Brown Testifies Before House Subcommittee on TSP

(National Federation of Federal Employees)

Today, NFFE National President Richard N. Brown testified before the U.S. House Subcommittee on Federal Workforce, Postal Service and the District of Columbia.

Brown serves as the Vice Chairman of the Employee Thrift Advisory Council (ETAC).  ETAC is an advisory body to the Federal Retirement Thrift Investment Board, which oversees the federal government’s Thrift Savings Plan (TSP).

As ETAC Vice Chairman, Brown addressed two legislative changes to the TSP proposed by the Board: automatic enrollment in the TSP for new employees, and a change in the default fund for new enrollees who do not make specific investment allocations.

Through his testimony, Brown conveyed the pros and cons of the two proposed changes, as well as the ETAC’s overall support for both changes. 

According to the automatic enrollment provision of the  Board’s proposed plan, all newly eligible federal employees who do not affirmatively decline to invest a portion of their paycheck in the TSP would automatically have 3 percent of their base pay deferred on their behalf, the level at which they would receive a 100 percent agency match.  A 90-day grace period from the date of the first automatic contribution is included in the proposal, ensuring that any automatically enrolled participants who did not wish to participate in the TSP could withdraw the current market value of their employee contributions at any time during this period.

The ETAC had some minimal concern about the administrative costs and work involved in implementing the change, but the overall sense of the Council was that the benefits of automatic-enrollment outweighed the implementation costs.

Starting the habit of saving early on in one’s career increases the likelihood that an employee will continue contributing throughout his or her career.  Through compound earnings, even a modest automatic three percent contribution may lead to a sizable account balance over time, particularly when that three percent is combined with the automatic one percent agency contribution and additional three percent in matching funds that the employee will receive.  Initiating automatic enrollment will ensure that those employees who do not intentionally refrain from investing in the TSP will not continue to miss out on the dollar-for-dollar matching funds to which they are entitled.    

In the second proposed change to the TSP, all new enrollees in the plan who do not make an investment election will have their contributions defaulted to the age-appropriate Lifecycle, or “L”, Fund, based on the specific participant’s estimated retirement date, rather than the current G fund default now in place.  In the L Fund, money is allocated more heavily toward stocks for younger participants, which may lead to greater asset fluctuation and more risk, but are also expected to produce a higher rate of return.  The closer a participant gets to retirement, the more heavily the L Fund is invested in Government securities and bonds.

The ETAC had some concerns about this change, primarily that the L Fund does not yet have a long history, and that the change would expose enrollees to risk.  Participants may lose money in the L Funds, particularly in the short-term. 

However, as Brown conveyed during his testimony, ETAC members were largely in favor of a change to the L Fund for default allocations.  The TSP is intended to be a long-term investment vehicle for participants, so a default fund that maximizes the chance for growth is logical.  Furthermore, TSP plan participants are able to change their future investment allocations to a different fund or funds within the plan, as well as move their existing account balance via an interfund transfer.  Any employee who does not wish to invest in the L Fund would be able to easily make a different investment decision.

“The TSP is intended to serve as a key source of retirement income for federal employees, and both of the changes discussed today will help ensure that it provides the greatest possible benefit to all federal workers,” said Brown.  “I am proud of the work done by the ETAC on these issues, and was honored to present the Council’s views to Congress today.” 

For Mr. Brown’s full testimony, click here: http://www.nffe.org/ht/a/GetDocumentAction/i/5730