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No, Really, These People Are Insane

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So, here’s an idea for pensions in the United States:

Federal employees are among the last group of workers with a reliable pension plan. If you work for the U.S. government, you are automatically enrolled in the Thrift Savings Plan. Five percent of your pay goes into the plan, matched by the government. The assets are invested on a pooled basis in one of five plan options, and the management fees are almost nonexistent—about 0.04 percent compared to around 1 percent for conventional individual retirement accounts.

If others could join the Thrift Savings Plan, with government matching contributions, nearly everyone could have retirement accounts well into six figures by the time they hit retirement age.

Sounds very cool. It also sounds very like a 401 (k). So, here’s the government describing the government’s Thrift Savings Plan:

The Thrift Savings Plan (TSP) is a tax-deferred retirement savings and investment plan that offers Federal employees the same type of savings and tax benefits that many private corporations offer their employees under 401(k) plans.

Oh, OK, it is a 401 (k) plan. So, why do we need the Thrift Savings Plan?

Our friend Teresa Ghilarducci has come up with a terrific way of improving retirement income for low- and middle-income elderly people, who increasingly risk poverty in old age as pension systems collapse and 401(k) plans are a proven failure.

We should have a 401 (k) plan because 401 (k) plans are a proven failure.

These people are insane. But then it’s The American Prospect so we knew that.

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5 COMMENTS

  1. Having worked in the pension business most of my career I would hesitate to believe the 0.04% management fee number. It seems absurdly low and in my experience figuring out what that number really is for any plan was nearly impossible, there are too many ways to hide or recharacterize things. And, of course, poor investment performance with a lower management fee is not a good deal, it’s a wee bit more important to know the net investment return.

    • I have been a member of the TSP since it’s inception. It was designed as a vehicle by Ronald Reagan to partially privatize federal employees pensions. It was designed by the Democrat Congress to shore up Social Security by having federal employees start to pay into it.

      The the management fee is low because the Plan does very little management. You only have five funds to choose from: a Government bond fund, a corporate bond fund, a large cap stock fund, a small cap stock fund and an international stock fund. These mirror the S&P 500, Russell 2000, etc. The Department of Agriculture runs the TSP and takes care of a lot of the administrative overhead.

  2. Esteban: My experience as a UK customer bears that out. On one occasion I was put in contact with financial adviser who was supposed to run an analysis of my current plan in order to determine whether the company for which he worked could legitimately advise me to transfer out of it. He produced a spreadsheet with two rows: one for each of two elements of the charging structure that he had identified. As a result I was motivated to read the policy document and discovered (for the first time) that the charging structure had five elements: three of them charges and two of them rebates. Furthermore two of them were +5% and -5% (which, of course, equates to slightly less than 100%). Since the 5% rebate tapered by 1% tiers over the 25 years prior to the plan maturity date, I was then able to understand the actuarial basis for a tapering transfer penalty, but even after I had explained my reasoning the adviser still needed to check with the provider. At the start of our next meeting he ruefully greeted me: “If you’re ever thinking of changing careers…”.

  3. I was in the TSP and have and have had 401(k) accounts. They are really the same thing, and I can believe the expense ratio is lower for the TSP, if only because there are so many people enrolled in it. Millions of government employees, So fixed costs are spread over a larger pool.

    But I fail to see how forcing non-government employees to enroll and contribute to the TSP will help the problem faced by “low- and middle-income elderly people, who increasingly risk poverty in old age as pension systems collapse and 401(k) plans are a proven failure.”

    Low and middle income elderly are likely no longer working, so have nothing to contribute. Or have very little working career left, so same problem. They classicly don’t contribute as much to their 401(k) to begin with (despite company matches) so all this would do is force them to involuntarily contribute to the TSP. Just as easy to make the 401(k) contributions mandatory, eh? So what is the real reason for drafting the private sector to be folded into the government retirement account system?

    And what is the concern for the 401(k) system? Seems to work just fine, so I don’t see the “failure.” Unless by “failure” they mean that people don’t use it and so don’t save enough? Wasn’t that the reason for ERISA and 401(k)s? But if people don’t make enough in their paycheck that they feel they can afford to stash some of it away, it doesn’t matter what you call it.

    Seems more like a way just to get everyone on the government payment system and used to and dependent upon government making payments in order to survive. Turning the private retirement system into government welfare.

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