NCPA - National Center for Policy Analysis


January 4, 2005

As part of Social Security reform, President Bush is promoting the use of private accounts based on the model of Thrift Savings Plans (TSPs), the government version of a 401K plan, says the Wall Street Journal.

TSPs, which were created in 1986, are designed for federal employees, of which 3.4 million currently participate.

Unlike TSP plans, however, the personal accounts President Bush is promoting would have fewe, safer options. Observers say that most of the TSP investment options available carry some investment risk, and participants are allowed to switch funds too often.

For example, four of the TSP's five investment options are indexed funds managed by Barclay Global Investors, including an S&P 500 stock index, small-company stocks and an international stock index.

  • In December 1999 right before the peak of the stock bubble, TSP participants shifted $427 million from bonds and bond index funds into stocks; but in March 2000, TSP?s S&P 500 stock fund lost an average of 14.4 percent.
  • For three years, TSP participants transferred money out of stock funds, with the heaviest transfers occurring during steep downturns in stock prices; between June and October 2002, when stock prices were lowest, TSP participants withdrew $3.8 billion out of the S&P 500.

In other words, TSP participants responded to short-term market ups and downs, rather than investing for the long-term -- a problem faced in private 401(k) plans.

On the up side, however, TSP plans charge extremely low fees, about $6 for every $10,000 invested through the plan, compared to the average index fund, which is about $78 for every $10,000 invested, says the Journal.

Source: Tom Lauricella, "Model Reveals Social Insecurity," Wall Street Journal, December 22, 2004.

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