Limited Trading

Officials overseeing the Thrift Savings Plan announced last week that they would begin placing restrictions on the number of interfund transfers that participants can conduct each month. And while they tout the restrictions as in the best interest of the plan, many participants do not seem to be warming to the idea.

"This is a mind-boggling step toward a Marxist maneuver involving my retirement account," said Lynn Cook, a senior mechanic with the Army Corps of Engineers. "This is a surly move to gain control or power by some group or individual, and not for the good of the participants."

Officials overseeing the 401(k)-style plan said at a monthly board meeting they would begin allowing participants only two interfund transfers per month in April 2008. Thereafter, additional transfers would be allowed only into the government securities fund.

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

The increase in trading volume has caused the TSP to incur transaction expenses of more than $15 million in 2006, up from $2.2 million in 2004, officials said, and that higher trading volume can be attributed to fewer than 3,000 TSP participants engaged in frequent trading.

Still, those day traders do not appear to be the only participants upset by the new restrictions.

Cook said he examines the market on a daily basis, and typically makes one to two transfers per month based on his analysis. While the new restrictions probably will not affect his current trading activity, Cook still rejects any proposal that would alter his right to manage his money.

"It's like having a straight highway with no traffic and putting a 20-mile-per-hour speed limit sign on it," he said. "Solve the problem; don't make everybody pay for it."

Cook and many other participants believe the best solution to regulating trading would be to charge fees after a certain number of trades each month. "I would be just tickled to death with that," he said. "If participants want to trade once a day, then charge them for doing it."

Last week, TSP Executive Director Gregory Long said charging fees for excessive trading was not in the plans, noting that officials were not trying to punish participants or generate revenue. But one TSP participant said in an e-mailed comment that placing blanket restrictions on monthly trading was an even harsher rule.

"I would rather pay a small fee and trade daily than watch my money disappear with a stagnant account in a volatile market," the participant said.

Leon Kattengell, a statistician with the Army, agreed. He said he invests about 7 percent annually in the TSP and conducts two to three transfers monthly. "The market is very volatile, and you don't want to be losing money," he said. "It's just protecting your retirement account."

Kattengell said he believes the real trading costs were not attributable to the 3,000 traders, but rather a result of the cost required to manage the TSP's life-cycle funds, which shift investments from riskier to more conservative blends as participants near retirement.

"The need to balance daily for L funds participants is what's responsible for the fund management cost increase," he said, "and not the interfund transfers of the 3,000 members trying to protect and increase their retirement accounts."

Instead, Kattengell said, the TSP should reduce the number of L funds from five to two and limit participants to five trades a month.

Still, TSP Legislative Director Thomas Trabucco said Wednesday that while officials have heard many complaints about the costs of rebalancing the L funds, it's actually frequent traders who are overwhelming the system. In September and October, for example, when the average daily trade amount in the I Fund was $224 million, TSP found that rebalancing of L funds accounted for $16 million, while frequent trading accounted for $142 million.

"There are over 500,000 L fund investors, but just 3,000 frequent traders," Trabucco said.

Long said TSP will discuss the trading restrictions with the Employee Thrift Advisory Council, which consists of labor unions and other federal employee groups, before moving forward. Colleen Kelley, president of the National Treasury Employees Union, said Tuesday that the council is in the process of planning a meeting to discuss the proposal.

"I'm open to the idea that there's a problem and seeing what a viable solution is," Kelley said. "I'm sure we can find a way to fix the problem without penalizing the federal employees in the plan."