What is a Thrift Savings Plan?

Published by Thomas Herold in Investments, Laws & Regulations, Retirement

'Thrift Savings Plan' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Thrift Savings Plan represents a government created retirement savings vehicle. In 1986, Congress passed the Federal Employee Retirement System Act. This plan was established for the benefit of retired or present employees in the civil service of the federal government.

In 2001, Congress expanded the TSP so that it would include the members of the armed forces with the National Defense Authorization Act. This extended participation beyond the original civilian employees. Armed forces members were allowed to enroll beginning on October 9th of 2001.

The Thrift Savings Plan was set up to be a defined contribution plan. The goal behind its creation was to provide the federal government employees with similar retirement savings types of benefits as private sector workers had. Employees in the private sector already enjoyed these retirement savings opportunities via the available 401(k) plans. With every payroll check, plan contributions to both the 401(k) and TSP are deducted automatically.

These TSPs include a variety of different funds. Participants can choose from and invest in six different types. Among these are the government security fund, the common stock fund, the fixed income fund, the international stock fund, the small cap stock fund, and the life cycle fund.

The government security TSP fund is specifically managed by the Federal Retirement Thrift Investment Board itself. This fund’s management purchases U.S. government guaranteed Treasury securities that are not marketable. Because of this conservative and safe strategy, the G Fund does not lose money. Its returns are also lower as a result of this low risk.

The common stock fund is one of the index funds that track a particular benchmark. In the case of this C fund, it invests in a stock index fund which mirrors the composition of the Standard and Poor 500 Index (S&P 500). This means it buys an index based on the various stocks of the 500 medium to larger sized American corporations. Its goal is to replicate the S&P 500s annual performance.

With the fixed income fund, it also tracks a benchmark index. This F fund’s goal is to match the Barclays Capital US Aggregate Bond Index’s performance. This broad based index was established to represent the bond market in the United States. As such it returns earnings commiserate with American corporate bond performances.

As the name implies, the international stock fund buys prominent stocks of international companies. It also follows a benchmark index. This particular I fund tracks the MSCI Europe, Australasia, Far East Index also known as the EAFE. Its returns are made up of gains or losses from the stock prices, income from dividends, and fluctuations in the comparative currency valuations. Regardless of what is happening in international markets, this fund and the fixed income, common stock, and small cap stock funds are always fully invested.

The small cap stock fund buys the index fund of stocks which follows the Dow Jones US Completion Total Stock Market Index. This S Fund earnings come from both dividend income received and any losses or gains in the prices of the underlying stock.

An interesting combination is the life cycle fund. These are managed to invest in the five different TSP funds. They professionally determine the allocations and percentages in each based on the retirement time frame set by the owner. There are L2020, 2030, 2040, and 2050 versions which assume that within a few years of those dates the owner will be looking to retire and be more conservatively invested.

TSP benefits are several. Government agencies are able to match employee contributions. They also have an agency automatic contribution option. Employees can make catch up contributions when they reach a certain age. These funds feature low, affordable expense ratios. All contributions made to these plans are not taxed until the point where the money is withdrawn at retirement.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Thrift Savings Plan' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.