The Thrift Savings Plan (TSP) is known for its low cost investments, and the lower your costs the more of your investment gains you get to keep. But why are the investment costs in the TSP so low?
Check out this table from the January/February 2018 TSP newsletter:
Let’s examine the fine print, using the C Fund as a good example because it is equivalent to an S&P 500 index fund you would find at Vanguard, Fidelity, or any other investment firm.
First, note that the C Fund had gross administrative expenses of approximately 0.052%. The gross expenses are the costs of administering the TSP and include:
- The costs of operating and maintaining the TSP’s record keeping system.
- The cost of providing participant services.
- The printing and mailing of notices, statements, and publications.
That, however, is not what investors get charged. We get charged the net admin expense of 0.038%, which is highlighted by note #3.
Note #3 reads:
“Net administrative expenses are the expenses charged to TSP participants per dollar invested in the respective funds after offsetting gross administrative expenses with account forfeitures and loan fees.”
After “offsetting gross administrative expenses with account forfeitures and loan fees.” In other words, people who forfeit their account and borrow from their TSP help lower the fees for those who don’t.
Another portion of the TSP website provides more details:
“Expenses are offset by the forfeitures of Agency/Service Automatic (1%) Contributions of FERS and BRS participants who leave Federal service before they are vested, other forfeitures, and loan fees.”
When someone gets out before their federal contribution vests or they pay loan fees, they are lowering the investment costs for the rest of us. This is a major reason why the TSP’s expenses are so low.
For example, while we get charged 0.038% for the C Fund, the expense ratio of the Vanguard S&P 500 Index Admiral Fund is 0.04%. This is higher than the TSP C Fund, and we can thank those who take out loans from their TSP balance or get out and forfeit their government contributions.