TSP Loans Get More Expensive

January 21, 2004 (PLANSPONSOR.com) - Federal workers who have repeatedly gone to the financial well for a loan from their 401(k) plan will now find the exercise a bit more expensive as officials slap on a new $50 administrative loan fee.

The Thrift Savings Plan (TSP) is making the move in an effort to discourage government employees and retirees from using their retirement savings as a line of credit, the Washington Post reported (See Taking the Bull by the Horns ). The new fee kicks in July 1 to cover the costs of processing and administering each new loan. Currently, about 500,000 participants have loans, but the overhead costs are absorbed by TSP’s 3.2 million participants. Officials say, however, that only 4% of assets are out on a loan. “We have an awful lot of very small loans out,” TSP Executive Director Gary Amelio told one interviewer recently, labeling the existing program “very generous.”

TSP officials said their in-house review of pending loans showed some participants were borrowing to essentially give themselves a line of credit while others were regularly taking out loans to pay college tuition. Under the new rules, TSP participants will be able to take out only one general purpose loan and one residential loan. When paying one, they will not be allowed to apply for another loan for two months. Currently, TSP participants can hold two loans at the same time, and they may pay off a loan early and immediately request a new loan.

Officials said, the number of loans being taken out has increased in recent months, and noted that loans usually take up more processing time than other plan transactions. At the end of last year, TSP carried 934,563 loans, worth about $5.2 billion, on its balance sheet. Of the 500,000 participants who have loans, more than 40% hold two at the same time, TSP said.

In another matter, Amelio said TSP appears likely to save several million dollars in printing and mailing costs because only one in 10 participants have asked to receive paper financial statements. TSP announced in November that statements no longer would be automatically mailed because plan members can track changes in their accounts through the agency’s Web site and print out statements whenever they need one.