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Have You Looked Into the TSP Mutual Funds Window?

 

That buzz in the air—it’s not a problem with your hearing.

It’s people talking about a new feature for TSPs called the “TSP Mutual Funds Window” (Or MFW, for short; in case you forgot, a TSP is a “Thrift Savings Plan.”) This new MFW option was made available to TSP participants in early June of 2022.

Everyone’s got questions: “What is this MFW thing? How does it work? Is it something I should do? Or something I should avoid?”

Let’s dive in.

 

What is a TSP Mutual Funds Window?

It’s basically a separate account inside your TSP. You only have one TSP, but this “mutual funds window” functions like a brokerage account inside your TSP. 

What are the administrative details of a TSP Mutual Funds Window?

If you go to the government’s TSP page, you can read all the eligibility requirements and rules. In short:

  • The minimum transfer is $10,000.
  • The maximum investment can’t be more than 25% of your total TSP account balance.
  • There are over 5,000 funds you can choose from.
  • There are additional fees for using the mutual funds window—$150 in annual administrative and maintenance fees and a $28.75 fee per-trade fee. (This is in addition to any fees charged by the mutual fund).
  • You’ll need to create a new log-in for the new MFW account.

How does the TSP Mutual Funds Window work?

  • You don’t—in fact, you can’t—directly contribute to the mutual fund window.
  • You have to transfer money over from your TSP. It’s basically a separate account inside your TSP.
  • You can only make two fund transfers a month.  The only exception is to move things to a G fund.
  • If you want to take a TSP loan or a withdrawal, you’ll have to transfer the money from the mutual fund window back into the regular part of the TSP. Of course, every time you do that there will be trade fees.

Why would anyone use the TSP Mutual Funds Window?

What are the pros of using the Mutual Funds Window?

1. To gain further diversification


There are limitations inside of the TSP fund. You have a C fund that is similar to the S&P 500. You have an S fund, which is the next 1,500 biggest companies, and you have the international fund which is mainly domesticated in Europe, Australia, and Asia.

Even with all that, there are some areas that are left out of the regular TSP funds. If you want to get more specific by getting some microcap funds, which are super small companies, or get some specific funds that deal with an area of the market that you don’t have access to, then the mutual fund window gives you that option.

2. To take advantage of actively-managed funds


Another pro of using the mutual fund window is that there are actively managed funds available in the mutual fund window.

How is an actively managed fund different from a passively managed fund? Actively managed funds try to beat the market by doing research and actively trading, i.e., buying and selling stocks. Passively managed just buy an index and hold those stocks without trying to buy or sell.

The current TSP funds are passively managed. The C fund is set up to mimic the S&P 500. The fund managers aren’t doing research. They’re not trying to buy certain companies and sell certain companies to beat the market. What’s in the C fund is in the C fund, and it is not actively managed. The C fund, the S fund, the I fund, they’re all managed that way, i.e., passively.

With the TSP mutual funds window, you have access to actively managed funds. This is where the fund managers are doing research and actively making trades, buying more shares of certain companies and less of others in order to try to beat the market. All of this research and extra trading cost more. For this reason, the expenses associated with actively managed funds are much higher than passively managed funds.

Now fees alone are not bad. But what are you getting for those fees? An article on finra.org notes that, in any given year, most actively managed funds do not beat the market. In fact, studies show that very few actively managed funds provide stronger than benchmark returns over long periods of time, including those with impressive short term performance records.

Because passively managed funds aren’t trying to outperform the S&P 500—they’re simply trying to match it—they buy the exact stocks in the exact proportions of the S&P 500.

Actively managed funds, however, are trying to beat the market. So, in any given year, for them to be worthwhile, they need to beat the market by the increased fee plus some additional return.

In short, the upside to the mutual fund window is that you have access to actively managed funds. That may or may not be a pro for you. You may decide that you don’t want actively managed accounts. But with the old TSP and the five fund choices, you did not have this option.

What are the cons of using the TSP Mutual Funds Window?


1. You can’t direct money straight from your paycheck to the mutual fund window.


It first has to go into the regular five funds or life cycle funds first and then on regular intervals, you have to login and manually send the money to the mutual fund window. Each time you do that there’s going to be a fee. What we find with human nature is when you have to start manually doing something it either doesn’t get done or it doesn’t get done well.

2. Taking money out (i.e., a TSP loan or a distribution), requires a manual funds transfer.


It’s just an additional cumbersome manual thing that you have to do. You can only access your TSP from the regular section of your TSP, and not from the mutual fund window.

3. Additional fees


The TSP has always been a low-fee place to put your money. Between the two different annual fees and the per transaction, trade fee, and then the fees involved in the mutual funds themselves, this is no longer a low-fee option.

4. Over 5,000 mutual funds to choose from


Some might consider this a pro—more options! But for others, having so many choices can feel overwhelming.

Besides being a low-fee place to invest, the TSP has also involved simple choices. There are five individual funds. People don’t have to do a lot of research to figure out what the five different funds are and make an allocation. But sifting through 5,000 mutual funds to figure out if which, if any, are most suitable for you takes a lot of work. If you want to nerd out and do extensive research, then this is a great option for you. Most of the people we interact with don’t want to do that—or don’t know how to do it well—and so having 5,000 choices does not come across as helpful.

 

Who is the Mutual Fund Window good for?

Two types of individuals:

  • The person that’s really into research and can do the proper due diligence on the mutual fund options in the window.
  • The person that wants specific funds with specific exposure to certain places in the market that you just can’t get within the TSP.

That’s who I think would benefit from using the mutual fund window.

Now, remember you can only put 25% of your TSP account into the mutual fund window. So, depending on how large your TSP balance is, this can be a lot of extra work and research and transactions and fees for just 25% of your account.

 

Who is the Mutual Fund Window NOT good for?

  • The person that is really focused on fees and wants the lowest fees.
  • Someone that wants simplicity in their choices of investments.
  • Someone that doesn’t want to do tedious research.
  • Someone who wants to contribute money directly to the fund of their choice and not have to go back in and do manual fund transfers. You can set your allocation and forget it, because you can contribute it where you eventually want it to go and stay.

 

Does the Mutual Fund Window fix most of the drawbacks of the TSP?

Not really. It really only fixes one of them. TSPs have always offered very limited investment selection, and the TSP mutual window does give you more options—but only for 25% of your assets in the TSP. That means 75% of your account still has limited choices.

What does the mutual fund window not fix? It doesn’t give you access to a financial planner, a professional that can help you plan for retirement, and make sure that you’re saving enough, that you’ll have enough, that you understand what your pension is going to be, what your Social Security is going to be, so that you can see whether retirement will work out with your current lifestyle.

TSP didn’t fix that. You still have to seek outside help for that.

They also didn’t do anything to allow you to do tax planning. Most of the people we talk to are very much “traditional TSP heavy,” meaning they have a whole bunch of traditional TSP, and they don’t have much of Roth TSP.

If you’ve watched any of our videos on tax planning, you know the importance of doing the math to figure out if it’s worth it for you to shift money from Traditional to Roth and pay some of the tax this year, do it again next year and the next year to slowly, but surely get your money, moved over to Roth, so that you end up paying taxes at today’s rate. The TSP does not give you that option. You cannot do a Roth conversion inside of the TSP. This is a huge drawback.

Why do I say that? If you’re someone who worries about taxes because you think they may go up in the future…if you’re someone who says, “Maybe I should go ahead and pay the taxes on my $500,000 TSP balance now, instead of 20 years from now when it’s worth 1.5 million. If this sounds like you, then this is a huge problem.

The TSP doesn’t let you fix this. Most people’s money is all traditional. Some have a little bit of a Roth, but not much. The TSP does let you contribute to Roth, but they don’t let you convert to Roth. That means if tax rates go up, or your traditional balances go up a lot, then you’ll be paying more taxes later.

At Christy Capital, we help clients figure out their lifetime taxes. We show them how much taxes they can expect to pay if they keep everything traditional. Then we look at a side-by-side comparison—what happens if you shift your money year by year to Roth. What are the estimated taxes then? This is a huge piece that the TSP still didn’t fix.

If you need help managing your TSP or managing your finances for your retirement, and you’ve got $400,000 or more to invest, please reach out to Christy Capital Management.

Click the “Talk with an Advisor” button and we will follow up and get you connected. 

If, for some reason, you’re not able to speak with an advisor, be sure to leave a message. We will call you back in short order.

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