Did you know that there's a way to identify a good investment
advisor (or investor!) by asking them a single question?
It's true. The question is: What do you think of the TSP?
The Thrift Savings Plan (TSP) is the 401(k)-like retirement savings
program for federal employees, including members of the armed
forces. It has over 4.5 million members.
Plenty of government programs are bloated, complex, and
ineffective. The TSP isn't one of them. The correct answer to the
question is, "It's great, and it should be open to everyone."
The TSP is Simple
Unlike some 401(k)s that offer dozens of investment options, the
TSP only offers five basic funds, plus a suite of target-date
funds. The basic funds are:
: A large-company stock index fund that mirrors the
: A small company stock index fund that mirrors the performance
of all US stocks not in the S&P 500.
: An international stock fund that mirrors the
MSCI EAFE Index
: A bond fund that mirrors the
Barclays Aggregate US Bond Index
: Holds government bonds that pay interest equivalent to Treasury
bonds with maturity of four years and up, but with no interest
rate risk. In other words, you can never lose principal in the G
With the exception of the G fund, these are all plain vanilla index
funds, the kind that beat the vast majority of actively managed
funds over time. There are no actively managed funds in the TSP.
The TSP also offers a suite of target-date funds, which roll the
five basic funds into a single fund that grows more conservative
over time. The L 2030 fund, for example, holds 67% stocks and 33%
While it might seem like it would be nice to have an endless salad
bar of investment choices, more choices don't lead to better
investing decisions. Faced by a bewildering array of options,
investors often respond by splitting their dollar evenly between
all the available funds, or just doing nothing and letting their
money sit in cash or a default fund that might not be appropriate
The TSP is Cheap
Because the TSP is huge, it can negotiate ultra-low prices. The
average large-company 401(k) charges participants 1.03% per year in
fees and expenses, according to the annual 401k Averages Book
survey. The TSP charges 0.027% per year. Yes, that means the
average large-company plan is 38 times as expensive as the TSP. The
TSP is also cheaper than any mutual fund or ETF you can buy through
Every dollar you spend on investment fees and expenses represents,
through the power of compound interest, many dollars you'll never
be able to spend in retirement.
The TSP Includes a Special Deal
The G fund offers relatively high-yielding bonds with none of the
risk of high-yield bonds. Of course, in the current environment,
"relatively high-yielding" is still less than 2%. Still, it's
probably better than any bond fund available in your 401(k).
Why Some Financial Advisors Hate the TSP
You can see, I hope, why the TSP is great. Obviously, the best
advice you can give to anyone with access to the TSP is to save as
much money in it as possible.
So why would anyone advise anything else? Two reasons.
1. Advisors who make money selling products on commission don't
make a dime when you put more money into the TSP. If they can
convince you that the TSP is a risky government scam or doesn't
offer the kind of investments you deserve, they can turn more of
your money into their money. This type of advisor is commonly found
near US military bases, giving soldiers the hard sell.
2. Brokers who want you to believe that they can beat the market by
trading stocks or choosing the right slate of actively managed
mutual funds will try to tell you that the TSP's reliance on index
funds dooms you to merely average performance. This is wrong. Once
fees and taxes are taken into account, the vast majority of active
investors underperform low-cost index funds. Trying to beat the
market through active management is a poor strategy.
Now, what good does any of this do you if you don't work for the US
Easy. If you're interviewing financial advisors, ask them about the
TSP, even if you're not a member. Obviously, being in love with the
TSP isn't the only thing you should look for in an advisor, but any
advisor who reflexively badmouths the TSP isn't looking out for
Second, you can invest as TSP-like as possible in your own 401(k)
or IRA. Choose the simplest, cheapest index funds you can. If it
seems too simple to be real investing, you're probably on the right
Editor's Note: This article by Matthew Amster-Burton was
originally published on
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