Employee groups back automatic TSP enrollment, new default fund

A federal Thrift Savings Plan advisory panel decided Tuesday to back proposals for legislation allowing automatic employee enrollment in the plan and changing the default fund for indecisive investors.

At a biannual meeting of the Employee Thrift Advisory Council, representatives from labor unions and other federal employee groups expressed support for the proposed changes to the 401(k)-style program on the grounds that both would be beneficial to participants.

Under the 2006 Pension Protection Act, Congress gave public and private sector organizations the ability to offer an "opt out" approach to 401(k) plans. The law allows organizations to automatically enroll employees into such plans unless they indicate otherwise.

TSP officials originally designed the proposal to offer a 90-day period for employees to opt out. But TSP Executive Director Gregory Long said agency responses to this time frame were negative, triggering officials to modify the proposal to provide enrollment immediately. Employees could later choose to get out, he said.

Long said the default contribution for automatic enrollment would be 3 percent, largely because employee contributions are matched fully up to 3 percent.

A representative from the National Treasury Employees Union indicated that the legislation should give TSP officials the flexibility of changing the default contribution, should 3 percent not prove to be the best option. "After some experiences down the road, you may have to go back to Congress and get a legislative change," he said. "That way, you don't have to go back to Congress if you discover that 3 percent isn't the right level."

Another proposed change involves switching the default fund for investors who do not express a preference from the less-risky government securities fund to the TSP's life cycle options, which invest in a more conservative mix of funds as employees near retirement.

TSP officials noted that employees who do express a preference are most likely to choose the L funds, warranting the change. But representatives of the groups indicated that changing the default fund would require increased outreach to alert employees to the risks of investing in the L funds.

"We will let people know that if they don't make a choice, [money] will go into the L funds, and that does involve some risk," Long said. "The best long-term effects are in the L funds."

Representatives unanimously agreed that the default fund proposal would be beneficial. "Looking back on it now, knowing the advantage of diversifying investments, I support taking the default to the age-adjusted L funds," said Richard Strombotne of the Senior Executives Association.

Meanwhile, TSP officials and group representatives agreed to hold off on three other potential changes -- the addition of a Roth option, the allowance of contributions from bonuses and the addition of restrictions on where funds are invested.

Long indicated that offering the Roth option, which would allow employees to make after-tax contributions, would benefit a very small percentage of participants. "If you expect your tax rates in retirement are going to be higher when you retire than now, then it makes sense," Long said. "But that's not most people."

Long said he believed that given the internal costs of such an option to the TSP, and some agency concerns over increased payroll costs associated with the Roth option, it would be best to "wait a few years and revisit the issue at that time."

The president's 2008 budget request included a proposal that would allow employees to contribute bonus money to the TSP. "I don't see a lot of benefit for employees having this particular benefit right now, given the fact that they go right up to the [Internal Revenue Service] limit, which is $15,500 with a catch-up provision of another $5,000 for those age 50 and above," Strombotne said.

The council also determined that six different pieces of legislation recently introduced to divest funds that support terrorism in Iran and genocide in Darfur, Sudan, were not in the best interest of all participants. "Putting restrictions on funds of where employees should invest their money is not our business," said James Sauber, chief of staff of the National Association of Letter Carriers and chairman of the council.

Officials and employee representatives agreed to revisit the issue of divesting funds. In the meantime, they said, employees can make their own choices as to where to invest. "Just like if you don't like doing business at a particular store, you don't go there," said Richard Brown, president of the National Federation of Federal Employees.

The council also re-elected Sauber as chairman and Brown as vice chairman. Both are four-year appointments.

TSP spokesman Tom Trabucco said officials would discuss the automatic enrollment and default fund proposals with the TSP board next week. "We should get things rolling in the near term," he said.