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What Plan Sponsors Can Learn From the Thrift Savings Plan

How the benefits of TSP can serve as a guidepost for defined-contribution plans

Emily Tran


The Thrift Savings Plan, or TSP, is a defined-contribution retirement plan that is only accessible to federal employees and members of the uniformed services. Compared to many traditional employer-sponsored 401(k) plans, the TSP is more utilitarian and less expensive.

Although the TSP’s no-frills structure may not be the best fit for everyone, the plan can serve as a guidepost for how traditional defined-contribution plans should operate.

2 key benefits of the TSP that plan sponsors can learn from

  1. Combatting choice overload: Simplicity serves as the cornerstone of the plan’s design. When faced with too many investment options, employees can often become overwhelmed and may have a harder time deciding how they should invest their money. The TSP combats this effect by offering an investment lineup that’s relatively streamlined. The TSP features six investment options, while the average defined-contribution plan contains 18 investment options in its menu. However, it’s also important to note that the introduction of qualified default investments, or QDIAs, has helped to combat choice overload.
  2. Using low-cost funds: One of the biggest benefits of the TSP is its low cost. The plan lineup consists entirely of index trackers or passive options, with each fund having a baseline administration fee of 0.038% in 2016. The index options' expense ratios are generally in line with the cheapest mutual fund or exchange-traded fund options available to the public. Plus, the large size of the TSP (more than $500 billion in assets) helps to drive down costs. Although we believe active products can add considerable value to a core menu, the key lesson here is the importance of keeping costs reasonable.

Finding balance between simplicity and diversification

While the TSP excels in its simplicity, the plan's few investment categories impacts performance, for better or worse, at various points in time. The TSP's core menu includes an S&P 500 index tracker, a small-cap stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index, an international-stock fund that tracks the MSCI EAFE Index, and a Bloomberg Barclays U.S. Aggregate Bond Index tracker.

As solid as this lineup is, it misses exposure in a couple of worthwhile areas, such as emerging markets and inflation-protected bonds. Although this condensed lineup may work for the TSP, plan sponsors should aim for a balance between simplicity and diversification that's appropriate for their employee population.

The TSP gets a lot of things right. But keep in mind that this particular plan serves over 5 million participants and has more than $500 billion in assets—a size that helps the government provide great service while keeping costs low.

For the TSP, having a simple, utilitarian lineup is crucial in serving so many employees and retirees. Although this approach isn't appropriate for all plans, the typical employer can still learn a few lessons. Namely, it's important for employers to understand their employee populations and design a retirement plan that considers both cost and diversification while meeting their employees’ retirement needs.

Please see below for important disclosure.

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Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

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