Valuable savings tool goes unused

Two of three military members who separate or retire do so without having opened a government-run Thrift Savings Plan account, a benefit that has been available to service members since 2002.

Those who depart without an account leave behind a valuable tool that they could use repeatedly to dampen their costs while investing for retirement, said Gregory Long, executive director of the Federal Retirement Thrift Investment Board that oversees federal accounts.

Veterans and military retirees with the savings plans can’t continue to make tax-deferred contributions unless they become federal civilian employees or contribute income earned as drilling reservists.

However, Long said, veterans who move from job to job in the private sector, building 401(k) accounts as they do, can roll those nest eggs into their military account where expenses are far lower. Individual Retirement Accounts also can be transferred at any time.

Because so many eligible members don’t take full advantage of the benefit, the investment board has asked Congress to pass legislation to require automatic enrollment for new federal employees or service members. They could opt out immediately, however.

The programs provide ease of savings and tax benefits like most employer 401(k) plans. Savings build without hassle. Investment options are varied. Contributions, plus interest or capital gains, are tax exempt until monies are withdrawn. Withdrawals can begin without penalty at age 59 1/2 or earlier for those who separate from government service after age 55.

“It’s a benefit for life,” Long said. “If somebody in the Army starts an account, even if they only put a few thousand dollars in, and they leave four years later to work for whomever, we know for sure that placing their 401(k) with any other company is going to be substantially more expensive” than depositing it in their thrift savings plan.

Commercial firms that manage investment funds for 401(k)s typically impose annual fees of from 50 cents to $1 per $100 in account balances. Military savings plan fees are only about two cents per $100. Intel, Mobil and perhaps a few other corporations have gotten employee 401(k) fees down below 10 cents per $100, Long said, “but nobody does it as cheaply as we do.”

“The only two things that can screw it up,” he added, “are A) if you don’t open an account or B) after you leave the military you withdraw your funds. Then you’re out.”

It’s no accident that Long used soldiers in his example. The Army’s savings plan enrollment rate is 25 percent of active duty members, lowest among the uniformed services. The Navy’s enrollment is 51 percent. Public Health Service and NOAA officers enroll at rates of 68 percent and 64 percent, respectively. Air Force, Marine Corps and Coast Guard enrollments are in the middle of the pack, at 35, 33 and 30 percent, in that order.

The Army doesn’t encourage participation, at least not with the same fervor as the Navy. A retired officer working on Capitol Hill said he heard Army leaders argue against offering the accounts years ago. Similar arguments are said to be made today in opposition to automatic enrollment.

“Leadership saw this as a first step toward reducing military retirement,” he said. “They were always afraid that if we started down this road of giving thrift savings plans, that would give greater weight to the argument that military retirement, as designed, is too rich a benefit.”

Various pay studies, including the 2006 report of the Defense Advisory Committee on Military Compensation and this year’s report from the Commission on the National Guard and Reserves, call for a more flexible retirement plan for new entrants. They would replace current retirement, which provides no benefit unless a member serves 20 years, with a plan that combines early vesting in an old-age annuity with a savings account, that would be bolstered by government matching to encourage member investing.

Tom Trabucco, who coordinates Thrift Investment Board initiatives on Capitol Hill, reported back at its public meeting last December that congressional budget estimates on automatic TSP enrollment show “a loss of hundreds of millions of dollars in tax revenue,” the result of deferring taxable income for many more federal civilian employees and military members.

Drilling reservists can participate in savings plans. Their enrollment rate runs from a low of 8 percent among Marine reservists, to 21 percent for Air Force reserve components. Reservists must be careful that combined contributions from periods of drill or active duty, and those made through employer plans, don’t exceed the annual 401(k) contribution limit of $15,500.

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