NCPA - National Center for Policy Analysis


August 5, 2005

Every 401(k) and 403(b) plan sponsor in the country should take a close look at the federal Thrift Savings Plan, says Dallas Morning News financial columnist Scott Burns.

Like private sector 401(k) plans, the Thrift Savings Plan (TSP) is a defined-contribution plan for federal employees:

  • Federal employees contribute up to $11,000 of their income, tax-deferred, and receive an employer contribution equal to one percent of annual pay.
  • The TSP currently has five investment options based on major indexes and will soon offer five new lifecycle funds.
  • Annual fund expenses are 6 or 7 one-hundredths of 1 percent, which is about one-third the cost of Vanguard index funds and one-tenth as expensive as leading managed funds with the most assets.

To test the impact of fees over a working lifetime, Burns used an accumulation model that starts with a 25-year-old worker who saves ten percent of gross income. The worker enjoys a gross return of 9 percent, annual raises of 4 percent and an economy where inflation averages 3 percent. To accumulate enough savings to replace about 60 percent of earning power when retired, his nest egg needs to be 17 to 25 times his final target income. Consider:

  • A federal worker with negligible plan expenses would accumulate 17 years of needed final income by age 56, whereas a worker in a typical 1.2 percent annual cost plan would accumulate only 13.8 years.
  • A worker in an expensive 2 percent cost plan would accumulate only 12.7 years, 26 percent less than workers in the TSP.
  • The gap gets worse, not better, for those who work longer; by age 67, the worker in high-cost plan is at a 40 percent disadvantage to the worker in the TSP.

Burns says high-expense plans will not compensate for this gap by delivering superior performance.

Source: Scott Burns, "A Government Plan That Others Should Emulate," Dallas Morning News, August 2, 2005.


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