The Savings Game: Making the most of the Thrift Savings Plan

The U.S. government is the largest employer in the United States. Federal employees and members of the military participate in the federal government’s defined-contribution plan, known as the Thrift Savings Plan. Currently, there are about 6.2 million Thrift Savings Plan account holders. In this column, I will be reviewing the basics of this plan, its recent changes and how to use its features to your best advantage.

One of the Thrift Savings Plan’s significant advantages is that some contributions are matched by the government. If you participate in the plan, make the maximum contribution to maximize free money.

Once you leave your current federal position, you may no longer make contributions. However, you are allowed to maintain your Thrift Savings Plan assets and continue to reinvest interest and dividends. Because the annual costs of the plan are very low compared with workplace defined-contribution plans, consider maintaining the Thrift Savings Plan even if you cannot make new contributions.

The federal government established the Thrift Savings Plan on Jan. 1, 1987. At that time, it became a major component of the retirement plans of federal employees and military members. Prudent management of your Thrift Savings Plan defined-contribution plan, with Social Security and your defined-benefit plan, will help you meet your retirement objectives.

Federal workers who contribute up to 3% of their salary will receive an equivalent match. Between 3% and 5% the match is half. So those who contribute 5% of their compensation receive the maximum match of 4%. (You are allowed to contribute more than 5%.) Active military personnel automatically contribute 5% to their Thrift Savings Plan and receive the maximum federal match.

After 2010, new civilian federal workers and military members are automatically deferred to a target fund, known as a “lifestyle fund.” The fund assigned is based on your birthdate. Target funds are structured so that you are investing in both equities and bonds. As you approach your expected retirement age, the allocation of equities to bonds is changed so that the percentage of bonds increases. The further you are from retirement, the higher the percentage of equities. You do have the option to select a target fund that is more aggressive or more conservative.

When the Thrift Savings Plan was initiated, there was a limited selection of available funds. These funds, which have low annual costs, are still available to you if you prefer them over a target-date fund. One fund that is very attractive is the “G” fund, which is a conservative government bond fund with attractive returns.

In 2022, many new options were introduced to the plan. Although participants have new investment options available, the associated fees are expensive. So the new options have not been cost-effective for most participants. In addition, beneficiary information has not been transferred correctly. I do recommend that you verify that your beneficiary information is correct in the system.

When you leave active service or are no longer working for the federal government, you can no longer contribute to your Thrift Savings Plan. You do have the option to continue to maintain it or to roll it over to a traditional IRA or Roth IRA. You may find that the alternatives within your Thrift Savings Plan are more attractive than others outside it. The annual costs within the plan are low in comparison with many other alternatives.

Bottom line: Your Thrift Savings Plan is an important component of your retirement plan. Make the maximum contributions to receive maximum government matches. Monitor the performance of your investments in the Thrift Savings Plan. Don’t hesitate to make changes in options based on your investment objectives. If you do decide to use a financial planner for support, make sure he or she is well-versed in the Thrift Savings Plan and the options available.

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Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.