The number of active duty and military reserve members enrolled in the federal Thrift Savings Plan is expected to top 500,000 this month. And recent improvements could encourage many more to join, plan administrators say.
In July, the plan began year-round enrollment in place of semiannual “open seasons.” The open seasons didn’t always coincide with periods of transition, such as boot camp or reassignment, when members are already dealing with personnel offices and opening a plan account is more convenient.
A second, perhaps more important change was the introduction in August of Life Cycle or L Fund options. Designed by experts, the funds will keep Thrift Savings Plan savers on the “efficient frontier of investing” by providing “all of the investment return they should get for the risk they’re taking,” said Gary Amelio, executive director of the Federal Retirement Thrift Investment Board.
The board administers the plan for 1.9 million federal civilian employees, and since March 2002, for the military.
For service members, it’s an opportunity to save and invest in quality funds at minimum expense. Though the plan is intended to boost retirement wealth, participants can borrow against accounts to buy a car, finance college or make a down payment on a home.
A new recruit who contributes 5 percent of basic pay each month, about $57, and earns a modest return of 7.5 percent annually, will have $83,000 in the plan after 20 years. If the member retires, making no more contributions, the account will climb to $440,000 by age 60.
If the same member serves another 10 years, still contributing 5 percent of basic pay and drawing a 7.5 percent return, the account would grow to $257,000 at the 30-year mark and $658,000 by age 60.
A typical officer will accumulate $163,000 in 20 years, which would grow to $643,000 by age 60. If the officer stays 10 more years, the plan would climb to $483,000 by the 30-year mark and reach $927,000 by age 60.
Amelio, when he became executive director in June 2003, wanted to address two problems. One was that 52 percent of all assets were invested in government securities, which aren’t intended for long-term growth. Military savers are particularly cautious, with 57 percent still keeping 100 percent of their plan accounts in that fund.
“It won’t provide the kind of capital growth needed over a 20-, 30-, 40-year time horizon to provide a more comfortable retirement,” Amelio said.
His second concern was that plan investors were being overwhelmed by the fund choices and were uncertain how to allocate their assets.
“Most participants are not investment professionals. They don’t have the time to read up on everything and make intelligent decisions,” he said.
His solution to both problems, Amelio said, is the new Life-Cycle or L Funds. To create them, Amelio hired investment professionals to mix the five existing plan funds in combinations that maximize returns and minimize risk based on when investors expect to retire.
L Funds are explained in marketing materials and on the plan’s Web site, www.tsp.gov. Participants will soon receive a CD that explains how they can shift accounts into just one L Fund, and leave it there.
To comment, write Military Update, P.O. Box 231111, Centreville, VA, 20120-1111, e-mail milupdate@aol.com or go to www.militaryupdate.com.
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