TSP officials weigh automatic enrollment of employees

Thrift Savings Plan officials are reviewing recently enacted pension overhaul legislation to determine if they should seek to implement some of its features that apply to the private sector but not the federal plan -- including policies on automatic enrollment.

The reform measure, signed by President Bush late last week, aims to boost 401(k) participation in the private sector to 90 percent by encouraging companies to place employees in plans automatically unless they opt out. This provision would not apply to the TSP, said Thomas Emswiler, the plan's general counsel, in an Aug. 18 analysis.

But officials overseeing the 401(k)-style TSP could, with Congress' permission, set up automatic enrollment. Legislation would be required because under the 1986 Federal Employees' Retirement System Act, participants must choose to join the plan.

At a TSP board meeting Monday, Chairman Andrew Saul urged further discussion of this and other changes that the overhaul package could spur. "I think this is major, groundbreaking legislation, and we need to get up to speed on this," Saul said.

Board members agreed to have a longer discussion of potential changes based on the law at a November meeting.

Automatic enrollment may not be necessary to increase participation, at least for civilian federal employees, said Gary Amelio, executive director of the TSP. The civilian participation rate is close to 90 percent as it is.

But such a program could help boost military participation rates. A variety of issues would need to be considered before taking such a step, Amelio said. Figures provided at the meeting show July participation for the military services, including active duty and ready reserve members, ranging from 14.2 percent for the Army to 39.7 percent for the Navy.

An additional issue to consider is the administrative burden of dealing with participants who would decide to opt out of the TSP after being automatically signed up, Amelio said. Even if only a small percentage of participants do that, it could mean dealing with 50,000 changes a year, he said.

The TSP Board is planning to conduct a participant survey to gather additional information, including some about automatic enrollment. The survey, which is being prepared by consulting firm Watson Wyatt, will be mailed to about 20,000 plan participants. It will be designed to help inform other decisions as well, such as whether to change the default fund for investors who don't specify how they'd like their money allocated. Survey results are due Dec. 15.

Since last fall, Amelio has been considering asking the board to change the default fund from the government securities, or G Fund, to one of the life cycle (L) fund options. As with the automatic enrollment provisions, the board would have to get Congress' approval to make the L Funds -- a blend of the plan's five underlying funds that grows more conservative as participants age -- the default.

If the board decides to seek such a change, it would need to figure out details such as whether participants who haven't made their own selections would be placed into the same L Fund by default, or whether the default would be selected based on the participant's birth date.

A study on L Fund performance by Ennis Knupp & Associates will help in deciding whether to seek the change, Amelio said. With both this review and the participant survey scheduled to be complete by the end of 2006, the board expects to have information to help with decisions about potential legislative requests by next year.

Meanwhile, there are several other provisions of the pension reform law that apply automatically to the TSP. Most are administrative in nature. They include a new option allowing direct rollovers from the TSP to Roth IRAs for participants who meet eligibility requirements.