What Is the Thrift Savings Plan?

Image source: Thrift Savings Plan.

The Thrift Savings Plan is the retirement plan for most federal workers. Similar in many ways to the 401(k) plans that private employers offer, the Thrift Savings Plan, or TSP for short, gives federal employees the ability to set aside pre-tax money for retirement through a defined list of available investment options. Unlike many defined contribution plans, however, the TSP has extremely low costs, and that assures participants that only a minimal amount of their retirement savings will get siphoned off for fees and expenses. Policymakers therefore see the TSP as a model for others to follow in offering high-quality retirement savings vehicles to workers.

How the Thrift Savings Plan works

The TSP works a lot like a 401(k) plan does. Workers are allowed to contribute up to $18,000 in 2016 if they're younger than 50, with an additional $6,000 catch-up contribution allowed for those 50 or older. The TSP incorporates both traditional and Roth account characteristics, and that lets workers choose whether they want to contribute pre-tax money to get an upfront tax benefit or after-tax money to get tax-free treatment in retirement.

Those who are familiar with matching contributions in 401(k)s will also find them in the TSP. The federal government matches contributions for those who are eligible under the Federal Employees' Retirement System. If you contribute 5% of your salary, you'll get an additional 5% from the government, 4% coming from matching and 1% coming from an automatic contribution made regardless of your level of participation.

TSP investments and costs

One of the best features of the Thrift Savings Plan is its cost. The plan's expense ratios on its investment options are extremely low, and the TSP said that its average cost was just 0.029% in 2015. That means that for every $10,000 you have in the plan, you'll pay just $2.90 per year in fees. Compare that to the $100 or more that many 401(k) plans charge, and you can see how much money the TSP can save you as your retirement savings grow.

Moreover, the TSP's investment options are simple but diversified, using letters to identify themselves. The C Fund is an index fund that matches the performance of the S&P 500, while the S Fund owns small and mid-cap stocks and the I Fund invests in international stocks. The G Fund is the TSP's short-term cash equivalent, owning short-term government securities, and the F Fund holds fixed-income securities like government and corporate bonds to round out a balanced portfolio.

Just about the only downside of the Thrift Savings Plan is that it's not available to those who work outside the government. However, as a model of efficiency, many hope that the TSP will eventually become available for a wider range of American workers in both the public and private sector.

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