No spike in TSP loans, withdrawals despite weak economy

Thrift Savings Plan participants are not taking out more loans or withdrawing money from their accounts because of the weak economy, the plan's executive director said on Monday.

At a monthly meeting of the Federal Retirement Thrift Investment Board, Executive Director Gregory Long pointed to a Senate Special Committee on Aging hearing he testified at last week. Witnesses said that the private sector has experienced significant leakage in 401(k) plans due to increased loan and in-service withdrawal activity as a result of a tough economy, he said.

The hearing found that loans taken from 401(k) accounts not only were increasing, but the amounts taken out and the percentage of participants making withdrawals was growing significantly as well. Committee members noted that when 401(k) participants used their accounts to make daily purchases like a cup of coffee, they were distorting the intended use of such plans.

Committee Chairman Herb Kohl, D-Wis., also shared his concerns over recent advertising campaigns by Fidelity and TIAA-CREF that encourage federal employees and retirees to move their retirement savings out of the TSP and into higher-fee accounts. Kohl wrote letters last week to the companies running the advertisements, calling the ads "a disservice to hardworking public servants."

But Long said at Monday's meeting that TSP was doing better than most private sector companies and participants were not turning to TSP loans or in-service withdrawals to bolster their financial situation during the economic downturn.

Currently, active federal employees who prove financial hardship may withdraw their contributions and attributable earnings from TSP accounts. Participants must specify a requested dollar amount of $1,000 or more and must demonstrate a need by providing financial information. Active employees also may take out up to two low-interest loans -- a general purpose or residential loan -- at one time.

Long said while in-service withdrawals from the TSP were up slightly, he didn't see any reason for concern, especially when compared with problems related to private sector 401(k) plans. "This speaks to the federal workforce and the level of maturity," he said. "They're doing things right."

Meanwhile, Long noted some concern with legislation passed last week by the House Oversight and Government Reform Committee that would require the addition of a Roth option to the TSP.

"The Roth is something that created some significant concerns for us because it is expensive … but we also recognize that there are members of the TSP who would benefit from it," Long said. "I know there are some folks on Capitol Hill who would like us to move faster, but we need to do our homework before we move."

Tracey Ray, chief investment officer for the TSP, said despite significant market volatility in June, the number of interfund transfers was low, at 93,000. She credited new transfer restrictions implemented in May as the reason for the decline.

The board also approved a recommendation reaffirming a current policy that the G Fund remains an investment solely in short-term maturities. Officials noted the current policy enables G Fund investments to produce long-term yields while incurring no market risk.

TSP officials also commented on a forthcoming report outlining what would happen to the TSP in the event of a bankruptcy at Barclays Global Investors, which manages the funds. Based on the draft report, officials said, there have been no findings that should cause concern.

"It's a very thorough study," said TSP General Counsel Thomas Emswiler, "and I feel very good about the way TSP assets are managed based on the information we have today."