TSP contributions will decline if debt deal cuts fed benefits, Congress told

Concern over changes to federal retirement benefits could result in government employees investing significantly less in the Thrift Savings Plan, according to observers.

Panelists on Wednesday told members of a House subcommittee that deficit reduction proposals threatening Federal Employees Retirement System benefits, such as moving from a high-three to a high-five annuity calculation or requiring workers to increase their contributions, could have a negative impact on TSP beneficiaries. As pay and benefits are cut, workers could have fewer dollars to invest in the plan, they said.

"A two-year pay freeze coupled with an increase in contribution rates to FERS that could exceed 5 percent of employees' pay, as some proposals have suggested, would, I believe, lead to a severe drop in contributions to employees' TSP accounts," said Clifford Dailing, secretary-treasurer of the National Rural Letter Carriers' Association. "I fear federal and postal employees will plan for the present rather than the future."

Witnesses assured lawmakers that the debt limit debate will not have an impact on TSP investments themselves. Federal law (Sections 8348 and 8438 of U.S. Code Title 5) requires the Treasury secretary to refill the coffers of the G Fund and the Civil Service Retirement Fund once the issue of the debt ceiling is resolved, and to make up, in addition, for any interest lost on those investments during the suspension.

Panelists also asked lawmakers to reconsider a proposal introduced last year that would allow federal employees to invest the cash value of their unused annual leave in their TSP accounts. The bill, abandoned after the Congressional Budget Office identified $317 million in related costs, would put TSP on par with private sector 401(k) plans, they said.

TSP has moved forward on several key initiatives authorized in the 2009 TSP Enhancement Act, according to witnesses, including the introduction of a Roth 401(k) plan. Originally scheduled to launch in January 2012, the option will be available later next year.

The agency also has successfully launched beneficiary participant accounts for spouses of deceased federal workers or military personnel enrolled in the TSP and in August 2010 began its auto-enrollment program, which signs up all new civilian hires to contribute 3 percent of their basic pay to the government securities (G) fund, unless they choose to terminate their contributions or change the amounts.

Under the 2009 law, the agency was authorized but not required to offer participants the option to invest in mutual funds outside the plan's offerings. Rep. Stephen Lynch, D-Mass., suggested that offering mutual funds would increase federal employees' flexibility and investment diversity, but TSP Executive Director Greg Long said the agency has not set a target date for the project.

"We may never move forward, quite frankly," Long said. "I think there is a paternalistic concern . . . those mutual funds will be more expensive than what our core options are and have a higher level of volatility."