Groups question TSP interfund transfer restrictions

A federal Thrift Savings Plan advisory panel on Wednesday appeared divided as to whether a new plan to restrict the number of transfers participants can conduct each month is the best way to address the issue of frequent trading activity.

The Employee Thrift Advisory Council, which consists of labor unions and other federal employee groups, probed whether officials could implement an alternate plan that would curb frequent trading while preserving the rights of participants to protect their accounts.

The ETAC meeting was called as a result of a regular board meeting last month at which TSP officials said they were considering allowing participants only two interfund transfers per month as early as April 2008. Thereafter, additional transfers would be allowed only into the government securities fund.

The proposal 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 TSP found that the majority of the higher trading volume was due to fewer than 3,000 participants who engaged in frequent trading.

Still, some labor groups questioned whether the proposal was too harsh. Catherine Ball, a representative of the National Treasury Employees Union, raised the issue of charging a fee to participants who exceed two trades per month as a potential solution.

But Tracey Ray, chief investment officer of the TSP, said that under such a plan, a small fee of $8 or $9 wouldn't begin to offset trading costs. Instead, some participants might have to be charged thousands of dollars in fees, depending on the amount and size of their trades.

"We felt the two trades a month allows flexibility for everyone and the ability for everyone to go into the G Fund if they get scared," Ray said. "A percentage fee is certainly an option, but we felt that would hurt the nonfrequent traders."

Other employee groups questioned whether the TSP could expand the number of trades allowed to at least three. James Sauber, chairman of the council and chief of staff of the National Association of Letter Carriers, proposed offering participants 24 trades per year so they could respond to market volatility.

Richard Brown, vice chairman of the thrift advisory council and president of the National Federation of Federal Employees, expressed support for the restrictions, at least in the short term. He said he has received no comments on the issue from NFFE members, but has gathered information from a group of nonmembers.

Brown noted that frequent traders already have banded together online to oppose limits on trading. He pointed to a Web site that council members were directed to that includes a petition signed by more than 2,000 TSP participants opposing the new restrictions.

"That shows that they act collectively, at least by their own hand," Brown said. "It's a concerted effort from those upset who are sending us this Web site."

Long said TSP's central concern is that in the I fund, at least, transaction costs are leading to lower returns for long-term holders. "This is not about us being paternalistic; this is about the cost and the impact to everyone else," he said.

Council members agreed to weigh the proposal to limit trades and determine whether another meeting might be needed. TSP officials said they would provide council members with a draft of the regulations before publishing them in the Federal Register, giving members two weeks to contact the board with questions or suggested changes. Officials plan to publish the interim regulations in January, opening them to public comment for 60 days.

In the interim, however, council members gave TSP officials the go-ahead to send letters to 3,000 frequent traders, requiring them to stop their activity or face being restricted to requesting interfund transfers via mail until the automated curbs take effect.

"This is a retirement fund, not a day-trading account," Brown said. "The goal here is what is for the greater good of all, not for the greater good of a few."

Meanwhile, Long said a plan that would allow spouses of deceased federal workers to leave their savings in the plan "is not as unusual" as he originally suspected. The plan was proposed by Richard Strombotne -- who represents the Senior Executives Association on the Employee Thrift Advisory Council -- at a meeting earlier this year.

Currently, a surviving spouse beneficiary must either accept the assets of the TSP account as a lump sum, with the tax consequences, or roll over the assets to an Individual Retirement Account. But Strombotne argues that IRAs have expenses that are dramatically higher than the TSP, placing an additional burden on surviving spouses.

At a June council meeting, TSP officials voiced concerns about the idea, arguing that it would seem strange for them to maintain an account for a participant who has likely never been a federal employee. But Long said Wednesday that in researching other 401(k) plans, he found the surviving spouse benefit to be common. Still, he added, some "operational concerns" about the proposal would need to be considered.