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I am a big fan of the Thrift Savings Plan (TSP) - a retirement plan for Federal employees that’s modeled after private-sector 401(k) plans. The plan’s low fees are the reason why. Employers can help their 401(k) participants pay similar fees by copying the TSP’s fund lineup and paying 100% of their plan’s administration fees from a corporate account instead of plan assets. 401(k) participants retire years faster or a lot richer when their employer takes these steps.
The TSP is the largest defined contribution retirement plan in the United States with about $800 billion in assets. Given the TSP’s buying power, no 401(k) plan can hope to match its low administration and investment fees. However, it is possible for 401(k) and TSP participants to pay similar fees. Here’s how.
Copying the TSP’s Fund Lineup with a 401(k) Plan
The TSP’s fund line-up has fifteen investment options - four index funds (F, C, S, and I Funds), a capital preservation fund (G Fund), and ten Target Date Index Funds (TDIFs) that invest in a mix of the G, F, C, S, and I Funds (L Funds). The TSP’s index funds deliver market returns for low fees, while the TDIFs make it easy for participants to maintain an appropriate asset allocation throughout their working years.
Except for the G Fund, employers can pick comparable funds for their 401(k) plan. The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. government. However, 401(k) plans have other capital preservation options. Most plans pick a money market or stable value fund for this purpose.
Below is a comparable lineup using Vanguard index funds. While the Vanguard funds cost more, they are still low cost. Employers can offset much of the cost difference by paying 100% of their plan’s administration fees from a corporate account.
|
TSP Funds |
Similar Vanguard Funds |
|||||
|
Name |
Description |
Expense Ratio |
Name |
Symbol |
Expense Ratio |
Expense Difference |
|
G Fund |
Match the performance of the Bloomberg U.S. Aggregate Bond Index |
0.000% |
Vanguard Federal Money Market Fund* |
VMFXX |
0.110% |
0.110% |
|
F Fund |
Match the performance of the Bloomberg U.S. Aggregate Bond Index |
0.015% |
Vanguard Total Bond Market Index Fund* |
VBTLX |
0.050% |
0.035% |
|
C Fund |
Match the performance of the S&P 500 Index |
0.001% |
Vanguard 500 Index Fund |
VFIAX |
0.040% |
0.039% |
|
S Fund |
Match the performance of the Dow Jones U.S. Completion Total Stock Market Index |
0.016% |
Vanguard Extended Market Index Fund |
VEXAX |
0.060% |
0.044% |
|
I Fund |
Match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index |
0.010% |
Vanguard Total International Stock Index Fund |
VTIAX |
0.110% |
0.100% |
|
L Income |
Achieve the best expected return for the amount of expected risk that is appropriate given the participant's target retirement date. |
0.002% |
Vanguard Target Retirement Income |
VTINX |
0.080% |
0.078% |
|
L 2025 |
0.004% |
Vanguard Target Retirement 2025 |
VTTVX |
0.080% |
0.076% |
|
|
L 2030 |
0.005% |
Vanguard Target Retirement 2030 |
VTHRX |
0.080% |
0.075% |
|
|
L 2035 |
0.005% |
Vanguard Target Retirement 2035 |
VTTHX |
0.080% |
0.075% |
|
|
L 2040 |
0.006% |
Vanguard Target Retirement 2040 |
VFORX |
0.080% |
0.074% |
|
|
L 2045 |
0.006% |
Vanguard Target Retirement 2045 |
VTIVX |
0.080% |
0.074% |
|
|
L 2050 |
0.006% |
Vanguard Target Retirement 2050 |
VFIFX |
0.080% |
0.074% |
|
|
L 2055 |
0.006% |
Vanguard Target Retirement 2055 |
VFFVX |
0.080% |
0.074% |
|
|
L 2060 |
0.006% |
Vanguard Target Retirement 2060 |
VTTSX |
0.080% |
0.074% |
|
|
L 2065 |
0.006% |
Vanguard Target Retirement 2065 |
VLXVX |
0.080% |
0.074% |
|
*Similar, but not fully comparable
How Close 401(k) Participants Can Get to Paying TSP Fees
Employers can dramatically increase the balances of their 401(k) participants by paying 100% of their 401(k) plan’s administration fees from a corporate account. The reason is compound interest. When 401(k) administration fees are paid from plan assets, they reduce the investment returns of participants dollar-for-dollar. By eliminating these losses, employers can add tens of thousands of additional dollars to participant balances over time.
While the TSP’s administration fees are unbeatably low, they’re still paid from plan assets. That means employers can help their 401(k) participants pay lower administration fees by paying them from a corporate account.
Administration Fees Paid by TSP Participants
The administration fees paid by TSP participants are net of forfeitures and loan fees. Below is the amount – depicted as a percentage of assets – deducted from fund returns annually:
|
Fund |
Gross administrative expense ratio |
Net administrative expense ratio |
Investment expense ratio |
Total expense ratio (Net admin + Investment) |
|
G Fund |
0.053% |
0.043% |
0.000% |
0.043% |
|
F Fund |
0.053% |
0.043% |
0.015% |
0.058% |
|
C Fund |
0.052% |
0.042% |
0.001% |
0.043% |
|
S Fund |
0.053% |
0.043% |
0.016% |
0.059% |
|
I Fund |
0.053% |
0.043% |
0.010% |
0.053% |
|
L Income |
0.053% |
0.043% |
0.002% |
0.045% |
|
L 2025 |
0.052% |
0.043% |
0.004% |
0.047% |
|
L 2030 |
0.053% |
0.043% |
0.005% |
0.048% |
|
L 2035 |
0.052% |
0.042% |
0.005% |
0.047% |
|
L 2040 |
0.052% |
0.043% |
0.006% |
0.049% |
|
L 2045 |
0.052% |
0.042% |
0.006% |
0.048% |
|
L 2050 |
0.052% |
0.043% |
0.006% |
0.049% |
|
L 2055 |
0.052% |
0.042% |
0.006% |
0.048% |
|
L 2060 |
0.052% |
0.042% |
0.006% |
0.048% |
|
L 2065 |
0.052% |
0.043% |
0.006% |
0.049% |
*Similar, but not fully comparable
Comparing Total Fees
Below is a comparison of TSP and 401(k) fees assuming the 401(k) uses the Vanguard lineup and pays no administration fees from plan assets. A 401(k) participant would only pay about 0.032% ($32 per $100,000 invested) more annually than a TSP participant assuming both are 100% invested in a TDIF.
|
TSP |
401(k) |
|||
|
Fund |
Investment Expenses + Admin Fees |
Comparable Vanguard Fund |
Investment Expenses + Admin Fees |
Difference |
|
G Fund |
0.043% |
Vanguard Federal Money Market Fund* |
0.110% |
0.067% |
|
F Fund |
0.058% |
Vanguard Total Bond Market Index |
0.050% |
-0.008% |
|
C Fund |
0.043% |
Vanguard 500 Index |
0.040% |
-0.003% |
|
S Fund |
0.059% |
Vanguard Extended Market Index |
0.060% |
0.001% |
|
I Fund |
0.053% |
Vanguard Total International Stock Index |
0.110% |
0.057% |
|
L Income |
0.045% |
Vanguard Target Retirement Income |
0.080% |
0.035% |
|
L 2025 |
0.047% |
Vanguard Target Retirement 2025 |
0.080% |
0.033% |
|
L 2030 |
0.048% |
Vanguard Target Retirement 2030 |
0.080% |
0.032% |
|
L 2035 |
0.047% |
Vanguard Target Retirement 2035 |
0.080% |
0.033% |
|
L 2040 |
0.049% |
Vanguard Target Retirement 2040 |
0.080% |
0.031% |
|
L 2045 |
0.048% |
Vanguard Target Retirement 2045 |
0.080% |
0.032% |
|
L 2050 |
0.049% |
Vanguard Target Retirement 2050 |
0.080% |
0.031% |
|
L 2055 |
0.048% |
Vanguard Target Retirement 2055 |
0.080% |
0.032% |
|
L 2060 |
0.048% |
Vanguard Target Retirement 2060 |
0.080% |
0.032% |
|
L 2065 |
0.049% |
Vanguard Target Retirement 2065 |
0.080% |
0.031% |
Good Luck Finding a Willing 401(k) Provider!
Cost matters when saving for retirement. Low fees mean more savings to compound until retirement. No defined contribution retirement plan pays lower administration and investment fees than the Federal TSP. However, it’s not difficult for employers to help their 401(k) participants pay about the same as TSP participants in total fees. They just need to pick a comparable fund lineup and pay 100% of their plan’s administration fees from a corporate account instead of plan assets.
More difficult is finding a 401(k) provider like Employee Fiduciary that’s willing to make the approach work by charging no hidden fees for plan administration. Hidden 401(k) fees can’t be paid from a corporate account because they’re baked into the expenses of plan investments.
