More investment options: Good idea, or not?

Thursday - 9/15/2011, 2:01am EDT

How many fund choices should the 4.5 million federal/military/retiree investors be offered as part of their Thrift Savings Plan?

Currently they can choose from five funds (the C, S, I, F and G funds), which invest in the U.S. stock market, a chunk of the international market, bonds and Treasury securities that are exclusive to TSP investors. In addition there are lifecycle funds that have shares of the C,S,I,F and G funds. The L-funds rebalance automatically.

But there are some TSP investors who want more choices.

Congress set up the federal 401k plan with strict orders that it be inexpensive to participants (low administrative funds), easy to understand and as safe as any investment can be. It authorized passive, managed funds like the C, S and I.

But that's not good enough for some people. They want to be able to take more risks (in hopes of getting much better rewards) and, presumably, they are willing to pay the higher fees that tightly managed funds require and charge.

Years ago, members of Congress with major financial backing from the real estate establishment pushed for a fund that would have been composed exclusively of mortgage-backed securities. That would have been a money-maker. For awhile. Now, not so much.

Later it was proposed that feds be able to invest in REITS (real estate invesments trust securities). The thinking was that even if the housing market tanked (long shot!) the REITS would always be strong. Wrong!

Various members of Congress have proposed that the TSP offer a gold fund, a precious metals fund, a high-tech fund (before the dot.com implosion), a socially-conscious fund and a fund that invests exclusively in minority-owned businesses. Although several members of Congress have proposed those different investment options over the years, the TSP's fiduciaries and the groups representing federal workers have not authorized them.

They want to keep the choices broad and easy-to-operate to protect investors and keep costs low. But some TSP investors find this paternalistic and unfair. They want to be able to invest in higher risk/higher reward options. Presumably they are willing to pay the higher management fees associated with the tightly managed funds. Here's what a couple of TSP investors have to say:

  • "...The threats to our pensions and social security would not be as relevant or as important if we were allowed to have an Open Season for our "401K" accounts instead of the agnostic, distant monopoly that we have now in the TSP. Rather than 185 millionaires over a 25yr period out of 4M participants, Fidelity, Vanguard, etc. would result in many, many more Feds have the kind of nest egg at retirement that would substantially soften the blow and make any reductions in the pension and entitlements easier to absorb -- IF WE WERE ALLOWED TO PUT OUR MONEY WITH A PROFESSIONAL MONEY MANAGEMENT FIRM THAT HAD OUR FIANCIAL WELL-BEING AND OUR FINANCIAL GOALS AS THEIR RAISON D' TERE. Instead, we're left with a monopoly that has no financial experience, does nothing to provide any financial advice or portfolio restructuring -- BECAUSE THEY AREN'T MONEY MANAGEMENT PROS -- and, the TSP does not offer the necessary broad breadth and diversity of funds, they don't sell or buy when it is in the best interests of the 'client' -- it is what is convenient for the administrator. When you have a monopoly such as the TSP and you cannot fire them unless you retire or are age 62 -- you have a big problem. Monopolies are almost never good, they breed arrogance, contempt, complacency and indifference. When are you going to start realizing this and help promote an Open Season for Investing? If it is good enough for Health Care -- It is Good Enough for investing. Otherwise, we're left in a system that is practically impossible for growing one's nest egg to the degree one needs to be financially comfortable. Your chances of amassing $1M in the TSP is virtually zero — by your own words and article — which you hailed. 185 millionaires out of 4M participants in a 25yr period is an atrocious failure." V/R, RCP

  • " I am all for more investment choices for federal workers. But I don't want our C,S, I, F and G fund investors saddled with higher fees of managed plans chosen by some employees. So here's an idea: If you want to invest in a Russia fund, a gold fund or a REIT, do it? Invest outside of the TSP via an IRA. You want to be a a rugged individual? Then act like one. Invest on your own. Don't wreck the TSP because you think you can time the market." Chuck D.