Obstacles Remain to Military's Use of Thrift Savings Plan
By Jim Garamone
American Forces Press Service
WASHINGTON, Nov. 4, 1999 Service members may get the chance in 2001 to build retirement nest eggs in the federal Thrift Savings Plan, but only if serious obstacles are overcome.
The Thrift Savings Plan is a savings vehicle, said Navy Capt. Elliott Bloxom, DoD director of compensation. "It is an opportunity for people to save for future requirements," he said. "We think our people ought to enjoy that same ability to save for the future as anybody else."
The fiscal 2000 National Defense Authorization Act contained a provision that would allow members of the uniformed services to join the investment plan. TSP contributions come off the top of the participants' income, thus lowering their taxable income, withholding and income taxes.
While the authorization act would allow TSP enrollment, it also requires that legislation be proposed and enacted that would offset tax revenue losses through 2009 caused by members sheltering income in the plan. DoD officials estimate more than $480 million in offsetting legislation must be enacted to make service members' TSP participation a reality.
The offset requirement is a new wrinkle, TSP officials said. The last major increase in TSP membership, the addition of judicial branch workers, had no such requirement.
Another hurdle, TSP officials said, is the sheer size of the uniformed services. The TSP currently has 2.5 million participants. DoD alone could potentially double the rolls -- it has 2.6 million active and reserve members in uniform. TSP officials said there would probably be some growing pains.
Additionally, TSP officials have advised DoD the plan would need about $10 million to allow reserve component members to participate. Absent this appropriation, they would assess annual administrative charges of 8.4 percent of reserve participants' account balances and 1.5 percent of active duty participants' account balances.
Such charges would make participation by the military unattractive, DoD officials said. Federal civilian employees pay only .06 percent in annual administrative fees.
TSP is a tax-favored retirement savings and investment plan established by the Federal Employees Retirement System Act of 1986. The military participation authorized by Congress would be in addition to the military retirement system and would not replace it.
All federal civilians can participate in the TSP, although the rules differ depending, generally, on their date of employment. Civilian employees who came aboard after the 1986 law took effect can contribute up to 10 percent of their yearly base incomes or a $10,500 maximum in 2000. The federal government matches the first 5 percent of their contributions.
Most service members, however, would join TSP under the rules applied to Civil Service Retirement System workers -- those employed before FERS took effect. These workers can invest up to 5 percent of their annual income, also to a $10,500 maximum in 2000, but with no government match.
If implemented, a service member would be able to invest up to 5 percent of basic pay and part or all of any bonus money received so long as the total the member contributes for the year does not exceed $10,500. The government would not match these contributions, but the Defense Authorization Act contains a limited matching program: It allows each service the discretion to match contributions of members in certain hard-to-fill military specialties.
The TSP contribution rules reflect the differences in employee retirement systems. CSRS employees contribute to a nonportable retirement plan that pays liberal pensions, but only to careerists. The three-part FERS retirement package of TSP, Social Security and a small pension guarantees less but is portable. It was created to make federal employment more attractive to persons who change jobs or who might not make a career of federal service.
While contribution rules differ, TSP's tax advantages are the same for all. TSP is like a civilian 401(k) plan. That is, the government defers income taxes on contributions, match funds and earnings until they're withdrawn, which is usually after workers retire. This is in addition to lowering current taxable income and income taxes.
TSP offers a choice of investments in three funds: the Government Securities Investment G Fund, the Common Stock Index Investment C Fund and Fixed Income Index Investment F Fund. Each fund has a different pay-off and risk. Participants can allocate their deposits and balances among any or all the funds.
The government guarantees G Fund investments and earnings. G Fund earnings rates tend to be lowest of the three, but virtually no risk is involved. The G Fund earned 5.66 percent in fiscal 1999.
The government does not back the C or F funds, and investors can lose money if the stock and bond markets fall. C Fund profits are unlimited, but investments ride the volatile stock market. The F Fund rides the commercial bond market, offering moderate pay-offs at moderate risk. C Fund fiscal 1999 returns were 27.74 percent; F Fund investors lost .43 percent in fiscal 1999.
All three funds were profitable for the 10 years ending in 1998: the C Fund earned 19.13 percent; the F Fund, 9.01 percent; and G Fund, 7.27 percent.
TSP participants also can qualify for low-interest loans from their own contributions and earnings while they are in federal service. The plan also allows limited in-service withdrawals for financial hardship.
Service members who leave federal service could do one of three things with their TSP accounts:
o They could leave the money in TSP and let it continue to appreciate. They could not add new contributions, however, unless they returned to federal civilian or military service.
o They could rollover their account into a comparable individual retirement account without paying early withdrawal penalty or taxes.
o They could pay any penalties and taxes and take their money.
For more information how the Thrift Savings Plan works, the three investment funds and their historical earnings rates, visit the TSP's web site. Civilian personnel offices also have information.