TSP Officials Worry Feds Who Made Hardship Withdrawals During Shutdown Won’t Return

The agency overseeing the Thrift Savings Plan will encourage participants who took hardship withdrawals from their accounts during the government shutdown to start contributing again next spring.

Officials from the Federal Retirement Thrift Investment Board on Monday said they would look into contacting more than 14,000 federal employees who turned to their retirement investments for cash in October, most likely through targeted mailings as the end of the six-month hiatus mark approaches. Employees who withdrew money citing hardship are banned from contributing to their accounts for six months, which means they also lose their agency’s matching contributions for that time period.

“Often, these participants don’t come back,” said Renee Wilder, director of the Enterprise Planning Office, during the board’s monthly meeting in Washington.

Gregory Long, executive director of the TSP board, said eventually the agency could devise a system to auto enroll participants who make hardship withdrawals back in after the six months are up. But that’s just at the discussion stage now, Long said.

The number of hardship withdrawals in October was a new monthly record for the TSP. Between 10,000 and 12,000 TSP participants make hardship withdrawals in a typical month, according to FRTIB officials, with the October jump to more than 14,000 coming as a result of the 16-day government shutdown that delayed paychecks for most federal workers. Roughly 900,000 federal employees were furloughed and unsure if they would receive pay for the time they missed when the shutdown began, while the remaining employees required to work were guaranteed retroactive pay when government reopened. While Congress opted to make all federal employees whole, thousands of workers took hardship withdrawals of at least $1,000 on their plans.

Employees who made the withdrawals had to prove negative monthly cash flow or extraordinary new expenses.

The TSP saw expansive movement in October, as government employees reorganized their portfolios because of the shutdown and the threat of the U.S. Treasury defaulting on its debts. Participants made 128,000 inter-fund transfers during the 16-day shutdown, a significant number of which went into the government securities (G) fund, the board said. About $4.5 billion was transferred into the G fund, the TSP’s most stable offering, during the first nine days of October, said Tracey Ray, chief investment officer of the board. By the end of the month, participants transferred out $5.5 billion. The government reopened on Oct. 17.

The TSP still had a strong month in October, with all the funds increasing, despite the uncertainty.

On Monday, the agency also announced it will move forward with its plan to automatically enroll new federal employees in its lifecycle funds, rather than the safer G Fund, after receiving an endorsement from federal employee groups at a recent meeting. The Employee Thrift Advisory Council -- made up primarily of federal employee unions and professional associations-- originally opposed the switch, saying members simply wanted the near-guarantee of TSP’s government securities fund.

The TSP overseers warned this was unsound fiscal logic, as employees would see much higher returns in the L Funds, which move federal employees to safer portfolios as they near retirement. As of April, the various lifecycle funds -- L Income, L2020, L2030, L2040 and L2050 -- had grown between 35 percent and 43 percent since their inception in 2005, while the G Fund had grown 28 percent in the same period. The board has found that many enrollees do not take the time to re-allocate their investments.

Since August 2010, all new federal employees have automatically had 3 percent of their base salaries contributed to their TSPs, unless the individual actively opted out of the plan. All employees receive at least a 1 percent agency contribution into their plans. More than 400,000 G Fund-invested, auto-enrolled accounts show no investment activity. These employees’ accounts would not be affected by the switch, as it would only apply to new hires.

The change from automatic enrollment in the G Fund to the L funds would require legislation. Kim Weaver, external affairs director for the TSP, said it was “too early” to know when the agency would draft legislation or which lawmaker would introduce it on Capitol Hill.

Eric Katz contributed to this story.