How The TSP Modernization Act Impacts Your Retirement Options

In November 2017, President Trump signed the TSP Modernization Act into law. This TSP bill is meant to increase participation in the government’s 401(k)-style retirement plan and make it easier for current and retired employees to access their funds.

Despite the ease of use of the new Thrift Savings Plans, many federal employees are left with unanswered questions. To address these concerns, the government released an updated Fact Sheet with frequently asked questions to help people understand the upcoming changes and how they might affect them.

What Does the TSP Modernization Act Change?

The first question that most people ask about the TSP Modernization Act is regarding what is going to change. This question can help you see whether or not the changes will affect your current situation and if you need to take steps today as a result of the new rules.

The FAQ sheet explains that there are four main changes to most TSPs:

• Multiple TSP withdrawals are allowed for employees 59½ or older.
• Employees can choose whether they want to withdraw savings from their Roth balance, traditional balance, or a mixture of both.  
• Employees who are older than 70½ and retired will no longer be required to make a full withdrawal.
• Retired employees can opt for quarterly or annual payments, and can make changes to their installment payments at any time.

As you can see, the goal of the TSP Modernization Act is to give employees more control. Requirements have been lifted on many requirements, and the withdrawal process is more flexible for everyone involved. In this way, the changes make it possible for TSPs to compete more with IRAs and traditional 401(k)s.

These Changes Are Based on TSP Survey Findings

In October 2017, the Federal Retirement Thrift Investment Board shared the results of a survey created with Gallup on customer satisfaction with Thrift Savings Plans and other federal benefits options. This data was compared with 2013 results to gauge changes over the past five years with how employees feel about their savings options and access. A few of the employee responses provide insight into these changes.

For example, 30% of active employees nearing retirement age say they will transfer funds from their TSPs upon retirement. When asked why they are moving their funds out of these accounts:

• 75% said there are more flexible retirement options available elsewhere
• 66% said they want better investment choices or performance
• 55% said they want to consolidate their retirement savings accounts
• 30% said there are lower costs or administrative fees elsewhere.

Clearly, the main issue the federal government faces with TSPs is flexibility, which explains why the TSP Modernization Act was hurriedly passed to address it.

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Additionally, federal employees also want clearer statements that are easier to understand. More than half of respondents (53%) said they want estimates of social security, FERS/CSRS, and TSP benefits in one account statement and online. This number shot up to 65% for survey participants ages 50-59, who need to balance multiple benefits accounts to keep their financial futures secure.

What Congress Hopes With These Changes

While the majority of the survey responses were federal employees who will retire soon, the true purpose of the TSP Modernization Act is to attract younger employees to start saving for retirement. The federal government relies on younger people contributing funds to support withdrawals from older employees. This is similar to health insurance plans, where young, healthy people support those who need medical care.

The federal government also wants to use TSPs as a recruiting tool. Employees who are concerned about retirement are more likely to look for jobs that offer reliable benefits. If the government can prove that it the TSP is a wise investment and make improvements to the processes, then more people might be willing to accept government jobs and secure their futures.

Improving recruitment efforts has been a significant goal of the government over the past few years, as more employees are lured to work for private sector companies that offer more flexibility and perks.  

30% of active federal employees nearing retirement age say they will transfer funds from their TSPs upon retirement.Click To Tweet

Review Whether a TSP Is Right For You

If you currently contribute to a TSP and want to make sure it’s the right option for you, or if you are worried about how these changes will affect your finances in the coming years, we can help.

Find a benefits specialist in your state who can look at your financial plan and make sure you’re getting the benefits you need and saving enough to prepare for retirement. We offer free advice and financial planning for current and former federal employees.  

Even if you think retirement is years (or decades) away, it’s never too soon to start planning. The steps you take today can set you up for financial success and ensure you have a comfortable and financially stable retirement. Contact us today.