Survivor Savings

There's little doubt that the Thrift Savings Plan is a highly valued and attractive investment program for federal employees. But should participants pass away, their spouses might not see the full benefits.

Currently, a surviving spouse beneficiary must either accept the assets of the TSP account as a lump sum, with the tax consequences, or have the assets transferred to a rollover Individual Retirement Account. But one representative of the TSP's Employee Thrift Advisory Council is hoping to change that rule.

Richard Strombotne -- who represents the Senior Executives Association at ETAC meetings -- is seeking the council's support for a proposal that would allow spouses of deceased federal workers to leave their savings in the plan.

"Because the TSP is run so efficiently, the administrative costs are so low," Strombotne said. "Even though the surviving spouse can move the funds, there is a loss of economic benefit in that process. It's a disadvantage for a surviving spouse to find another place to invest the money."

The TSP is not the only retirement fund with such a rule, however. Regulations governing private sector 401(k) plans are so burdensome that the managers of these accounts often decline to offer surviving spouses the benefit of leaving savings there, Strombotne said.

But the regulations governing private sector IRAs are such that the transfer of ownership to a surviving spouse is relatively easy, making that procedure a routine action, Strombotne noted. He said he believes that the same "ease of transfer" associated with private sector IRAs could be applied to the TSP.

Richard Brown, president of the National Federation of Federal Employees and vice chairman of ETAC, said Wednesday that he fears implementing the proposal would increase the administrative costs of the TSP. "That would be an administrative burden on a plan that would make everyone pay for the benefit of a few," he said. "I wouldn't support it based on that."

Typically, the TSP costs participants less than two basis points, or two cents for every $100 invested. Comparable private sector plans can cost 50 to 80 basis points.

Strombotne first offered the proposal to the advisory council in November 2004. Former TSP Executive Director Gary Amelio wasn't in favor, arguing that such a rule change was outside the TSP's hands and would require congressional action.

New Executive Director Gregory Long said Tuesday that TSP officials would look into the idea but could not promise any further action. "What strikes me as a little strange now, is this is an employer-sponsored plan," Long said. "This would make an account sponsored by someone who is not an employee of the federal government."

The proposal would need to generate support from all members of ETAC, which is composed of representatives from labor unions and other federal employee groups. The council could then propose or endorse legislation that would allow the Federal Retirement Thrift Investment Board to transfer ownership to the surviving spouse beneficiary.

If you have not designated a beneficiary for your TSP account, you can download the TSP-3 form from the TSP Web site, or obtain the form from your agency's personnel office. But keep in mind that there are different rules governing non-spouse beneficiaries, who are subject to 10 percent withholding.

Non-spouses can defer paying taxes by transferring their death benefit payments to an inherited IRA or by taking required minimum payments based on their own life expectancy. Still, the rules governing inherited IRAs are complicated, and the TSP recommends you discuss this benefit with your tax adviser or IRA provider as you do your estate or retirement planning.