Federal TSP Considering Expanded Withdrawal Options

The changes are intended to encourage federal employees to leave their balances in the TSP after they leave federal service.

Federal Thrift Savings Plan (TSP) Executive Director Greg Long has issued a memo to Federal Retirement Thrift Investment Board members recommending  more flexible withdrawal options for TSP members.

In the memo, acquired by FedSmith, Long says an examination of TSP data last year “confirmed that many participants are transferring their balances from the TSP to other financial institutions at age 59½ and upon separation from federal employment. Virtually all of these transferred dollars are moving into accounts with higher expenses than are available within the TSP, a fact that appears to run counter to the participants’ interest. … All else equal, moving into a higher cost retail IRA from the low cost of the TSP would reduce a participant’s net returns and negatively impact his/her retirement readiness.”

The memo noted that, in 2013, separated participants transferred $9 billion out of the TSP to other institutions, and a survey found 27% of these participants cited a desire for additional withdrawal flexibility as a motivating factor behind these transactions.

Long says benchmarking and outreach to plan sponsors made clear that both private and public sector plans typically offer greater withdrawal flexibility than the TSP. “Specifically, the benchmarking report noted a gap vs. the marketplace in withdrawal flexibility and suggested that the TSP consider allowing participants to take partial distributions once separated. It further noted that participants who take an in-service, age-based withdrawal in most other defined contribution plans are typically still eligible to take a partial distribution once separated. This is not the policy at the TSP. The TSP’s restrictions on how many and how often withdrawals can be made are areas where our restrictions clearly place us outside the norm of other plans and IRAs.”

NEXT: Recommended changes

The TSP currently allows participants who reach age 59 ½ to take one age-based partial withdrawal. If a participant takes a withdrawal at this time, he or she is not allowed to a take a partial withdrawal once separated from service. The memo suggests the TSP add flexibility by allowing multiple age-based withdrawals, and removing the restriction on post-separation partial withdrawals. The memo says this is expected to result in a decline in the amount of age 59 ½ withdrawals.

The memo also suggests creating a process for payroll to restart employee contributions to the plan following the six-month suspension upon taking a hardship withdrawal. With this change, it is expected that the number of active participants with a deferral rate of 0% seven or more months after a hardship withdrawal will decrease.

Other recommendations include:

  • Allowing multiple partial post-separation withdrawals, rather than just one; and
  • Adding flexibility to periodic payment withdrawals by allowing the election of quarterly or annual payments, permitting the payment amount to be changed at any time throughout the year, permitting stoppage of periodic payments while allowing the remaining balance to stay in the plan, and permitting flexibility to select a partial withdrawal or annuity purchase while in periodic payment status.
FedSmith notes that the changes require legislative action, so it is likely they will not be made for some time.