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Citing escalating trading costs, officials overseeing the Thrift Savings Plan are preparing to restrict the number of interfund transfers that participants can conduct each month.

At the monthly Federal Retirement Thrift Investment Board meeting on Monday, officials overseeing the 401(k)-style plan said they would begin allowing participants only two interfund transfers per month. Thereafter, additional transfers would be allowed only into the government securities (G) fund.

The change is a result of a recent analysis by TSP officials of the impact of trading activity on fund management and transaction expenses. Officials studied the fund with the highest costs, the international (I) fund, and found that in September and October, the average daily trade amount was $224 million, far above the daily trade amounts of $49 million in 2006 and $27 million in 2005.

Even more compelling, officials noted, was that 63 percent of the $224 million was attributable to participants who had traded eight or more times in the previous 60 days. And 48 percent was attributable to participants who had traded 12 or more times in the previous 60 days.

"Trade volume is up significantly, and the majority of this increased volume is attributable to less than 3,000 TSP participants engaged in frequent trading," said Tracey Ray, chief investment officer of the plan. TSP has more than 3.6 million participants.

Ray noted that on Oct. 19, $371 million was transferred into the I Fund. Three days later, she said, $391 million was transferred back out of the I Fund, and 2,018 of the participants transferring out were ones who had transferred in on Oct. 19. Additionally, in the previous 60 days, 323 of the 2,018 traders had completed 5,804 exchanges of the I Fund for a total trade amount of $1.9 billion.

"What we have here is a small group of people who are making an awful lot of transactions, destructing the ability to manage the fund and creating expenses," said TSP Executive Director Gregory Long.

As a result, the Federal Retirement Thrift Investment Board voted unanimously to limit the number of monthly transactions. Officials plan to announce the new restrictions in a letter that accompanies the annual statement to participants, which is scheduled to be mailed in early February. Implementation will occur in March or April, officials said.

In the interim, however, officials said they would mail letters to the 3,000 participants who are frequent traders, requiring them to stop their activity or face being restricted to requesting interfund transfers via mail until the automated curbs take effect.

These restrictions are in line with what most large mutual funds have enforced since a trading scandal in 2002, officials said. Some companies have elected to curb frequent trading by creating financial penalties for such behavior, charging redemption fees for shares held less than 30, 60 or 90 days, officials said.

But Long said charging redemption fees for excessive trading is not in the plans for TSP, noting that officials are not trying to punish participants or generate revenue. The goal, Long said, is to reduce transaction costs to the benefit of all.

"Those 3,000 participants will not be happy," Long said. "But my job is to take care of all participants, and this is clearly in the interest of all participants."

Long said the TSP will discuss the plan with the Employee Thrift Advisory Council before moving forward.

Meanwhile, officials are still in talks with lawmakers over the potential implications of two legislative proposals the TSP sent to Congress in late August. They would allow automatic employee enrollment and change the default fund for indecisive investors.

Legislative Director Thomas Trabucco said TSP is working with lawmakers to determine the indirect tax implications of the automatic enrollment proposal. Legislators have expressed concern that higher employee contributions would mean an increase in tax-deferred money, thus resulting in less money in the tax base, he said.

Officials plan to continue to work with the joint committee on taxation, the Congressional Budget Office and the House and Senate committees that hold jurisdiction over the TSP to determine a solution, Trabucco said.

COMMENTS

• Don't you think it might be a good idea if the TSP had some kind of a transaction history so at least you would be able to know if you exceeded the maximum transactions allowed. Right now "MY MOST RECENT TRANSACTIONS" shows a contribution and a catchup contribution and that is it. Get into at leasts the twentieth century with your transaction history before you impose restrictions. Greg Jones Posted January 31, 2008 3:48 PM
• I think it is a good idea. The "cost" of frequent interfund transfers goes well beyond TSP operating costs. Having witnessed some of this activity among coworkers in the past I suspect much of this aggressive TSP "day trading" is being done during working hours by these 3,000 participants. In order to trade this frequently with any hope of success you must study and watch the markets constantly. Most people cannot do this and perform their Federal employment duties concurrently without a serious impact to job performance. Once again a few people abuse the system and we all pay the price. James McCord Posted January 23, 2008 2:24 AM
• Ususally when an fund drops down it comes right back up. By moving your money too much you might lose money as it takes a few days to process and in that time your fund may go up. Right now with ony the 'F' and 'G' fund in the black it's best to stay out of the rest until the maket stabilizes. Linda S, Hill Posted January 23, 2008 2:05 AM