Reviewing Roth

The addition of a Roth option to the federal employee Thrift Savings Plan may be an attractive investment alternative to many participants, but it still may be a long ways off.

Unlike traditional 401(k) plans, Roth plans tax investments initially, but not when participants withdraw their retirement dollars years later, allowing any earnings accumulated from the funds to be taken out tax-free. The option can be especially attractive for younger investors, who likely fall in a much lower tax bracket earlier in their careers than when they retire.

Private sector employers have had the legal authority to offer Roth plans since Jan. 1, 2006, but the TSP isn't authorized to offer such accounts. According to a 2007 survey by Hewitt Associates, an employee benefits consulting firm, 12 percent of private companies offer a Roth option.

While TSP officials are not currently seeking authorization to offer a Roth option, plans to look into the costs and benefits of such a move are in the works. Once the TSP hires a new product development director (a position left vacant when Gregory Long moved to become executive director last March), he or she will take on the task of determining whether the Roth option is right for the TSP, said Thomas Trabucco, the plan's legislative director.

The majority of the plan's 3.5 million participants appears to support the addition of a Roth option. A survey released last year by Watson Wyatt indicated that 60 percent of participants believed the TSP would be a better program if it offered a choice of contributing to a Roth account.

Still, Trabucco said it could be another two years before a determination is made on the idea. If TSP officials ultimately back such a move, they'll have to go to Congress for specific authority.

"We want to see how private plans use their new authority, and we need to look into who in the federal sector could benefit," Trabucco said. "I don't think anyone would like us to spend millions in participant funds to set this up only to find that it is not very beneficial or popular."

Members of Congress, however, might press the TSP to accelerate its timetable. Rep. Henry Waxman, D-Calif, chairman of the House Oversight and Government Reform Committee, has expressed interest in extending the Roth feature to the TSP. His office did not return calls seeking comment.

"I would not be surprised if a legislative proposal regarding Roth is dropped in the hopper," Trabucco said. "This is the best method any member has to show interest in a new initiative."

A swift legislative move in support of Roth accounts could prove problematic. TSP officials say adding such a plan would entail overhauling the TSP's systems and communications materials and would require them to educate 3.5 million participants on how to choose wisely between pre-tax and after-tax investments. Agency payroll systems would have to be updated as well, officials say.

"We know it will cost money and a great deal of effort to set up," Trabucco said, "and before doing that we need to be relatively certain that a significant number of participants could benefit from it and would take advantage of it if it became available."

Scholarship Showdown

The Federal Employee Education and Assistance Fund is accepting applications for its 2008-09 scholarship program.

Civilian federal and postal employees with at least three years of service and their dependents are eligible to apply. Federal applicants must be full- or part-time students with a grade point average of 3.0 or higher. Dependents must hold an equivalent GPA and be full-time students to qualify.

Last year, FEEA awarded more than $471,000 to 481 students nationwide. The top six competitors were the first-ever recipients of the FEEA and National Treasury Employees Union scholarships, worth $5,000 each.

For more information on how to apply, visit www.feea.org/scholarships.html.