TSP chief urges Congress to back automatic employee enrollment

A large number of federal employees are not opting into the Thrift Savings Plan, an issue that could damage their retirement security, the head of the board that oversees the plan told a House subcommittee on Tuesday.

At a hearing before the House Subcommittee on Oversight and Government Reform Federal Workforce, witnesses expressed support for a proposal that would authorize automatic contributions to the TSP from all newly hired federal employees who did not specifically decline to contribute.

TSP Executive Director Gregory Long testified that 14 percent of employees in the Federal Employees Retirement System and 73 percent of military service members were not contributing to the TSP, making them "less likely to be financially self-sufficient in retirement than their counterparts who do contribute."

Further, Long said, FERS employees who did not participate were failing to collect the agency-matching contributions that Congress authorized for their benefit.

The automatic enrollment proposal would set the initial contribution rate at 3 percent of basic pay, with employees given the option to opt out or change their contribution at any time. Participants also would have a 90-day grace period from the date of their first contribution to withdraw the funds without penalty, though funds that were withdrawn would be treated as taxable income.

Long said many private sector 401(k) plans have implemented automatic enrollment since the 2006 Pension Protection Act allowed them to do so.

Del. Eleanor Holmes Norton, D-D.C., probed whether the TSP has done any research on the specific reasons federal employees choose not to opt into the plan. "The government doesn't pass out many pieces of paper that amount to money in your hands," she said. "I would request that you endeavor to find out more about who they are and what their reasons are and encourage them to come to the program."

Long said 24 percent of FERS employees who did not contribute to the TSP said they do not have the money to do so. TSP data also showed that while some noncontributors intentionally decided against participating, a significant number simply placed a low priority on returning required forms or failed to undertake any retirement planning efforts, he said.

Richard Brown, president of the National Federation of Federal Employees and vice chairman of the Employee Thrift Advisory Council, an organization made up of representatives of labor unions and other federal employee groups, argued that some employees were not receiving adequate information from their agencies on the benefits of the TSP.

Rep. Elijah Cummings, D-Md., pointed to the TSP's Web site as a reason some FERS employees did not understand the plan. "The fact is, if it's difficult to navigate your Web site, that's a problem," he said. "I literally had to go to member services to get someone to help me."

Long said TSP officials hired a consultant three months ago to conduct focus groups and evaluate the Web site. He said he expected a final report within three months, after which officials will begin to put the recommendations into effect.

Cummings argued that the board should move more quickly. "I think government should move very fast when it comes to peoples' money," he said.

Meanwhile, Long and Brown also expressed support for a proposal that would switch the default fund for investors who did not express a preference from the less-risky government securities (G) fund to the TSP's life-cycle (L) options, which invest in a mix of funds that grows more conservative as an employee nears retirement.

Long said a review by the TSP Board found that of those participants whose contributions were invested initially in the G Fund during the first quarter of 2004, only 26 percent submitted a request to move their money to other funds by the end of the following quarter, Long said. The board tracked the same group in the first quarter of 2007, and found that 48 percent of the investors never moved their money out of the G Fund.

Of most concern, Long said, was that 62 percent of the participants tracked were under 40 years of age. "For these participants," he said, "L Fund investments are a more appropriate default option and will enhance their retirement security."

Subcommittee chairman Danny K. Davis, D-Ill., indicated that the costs associated with proposed legislation would determine which bills would go to the House floor this year. While a change in the TSP's default fund likely wouldhave little cost associated with it, Davis expressed concern over the cost of the automatic enrollment proposal, noting that it could lower revenue for the U.S. Treasury, since more employees would be reducing their taxable income. TSP officials have said that an unofficial accounting indicates the proposal could deprive the Treasury of hundreds of millions in tax dollars.

"I hope that a way can be found to overcome that obstacle so more employees will make full use of the TSP in order to be better prepared for their retirement," Long said.