Six Things We Could Learn From The Governments TSP
Time and again I see the same common problems with small business 401(k) plans: They have high (often hidden) costs, poor participant outcomes (meaning: will people be able to retire adequately) , unexpected liability and poor investments . So how do you kill these problems with one stone? Make your 401(k) plan look like the largest defined contribution plan in the world: The U.S. Governments Thrift Savings Plan (TSP). The TSP has over $289 billion dollars in it and it covers 4.5 million current and former Federal employees. Here are six basic things business owners could learn from the TSP:
1. Appoint a Fiduciary Committee to oversee the 401(k). For the TSP plan, the President of the United States appoints 5 independent board members who, by law, must manage the plan prudently and in the sole interest of the participants and their beneficiaries. A business owner could do the same thing by asking senior management, key employees, an outside CPA and/or attorney to sit on the 401(k) plan committee. Have them acknowledge their fiduciary status in writing, properly cover them with insurance, pay them a token amount to meet annually, and provide ongoing 401(k) education for them.
2. Use Low Cost Index Funds Only: The people from the IRS and Department of Labor who can audit your plan, have only 5 low cost index funds and 5 target date index funds in their entire TSP plan. If index funds are the “prudent” choice put in place by the TSP board (most board members have credentials from the best Ivy League schools and lots of investment & banking experience), why aren’t index funds good enough for you? Having only low cost index funds from a firm like Vanguard, will drastically reduce plan costs and remove the liability of trying to pick hot mutual funds. Just a quick note here: Your broker may not like this idea if they justify their pay/existence by convincing you that they have a unique ability to spot the best mutual funds out there while avoiding the losers.
3. Consider A Safe Harbor Match: I usually see companies with the basic safe harbor match of dollar for dollar on the first 4% of pay. The TSP plan matches the first 3% of pay dollar for dollar and then 50 cents on the dollar for the next 4 and 5% of pay. This enhanced safe harbor match, as it is called, would encourage people to save a little more so they continue to get the full match, without costing the company any more money.
4. Automatically Enroll New Employees: The Pension Protection Act of 2006 gave clear legal cover (and encouragement) for employers who want to implement auto-enrollment and the TSP plan has automatically enrolled new employees at a 3% deferral rate since July of 2010. Auto-enrollment can help streamline administration (everyone is in unless/until they opt out) and drastically improve participation rates.
5. Add The Roth 401(k) Option: The TSP now allows people to save money after-tax in the Roth TSP option and your plan should too. For highly paid executives who make to much money to qualify for a Roth IRA on their own, this feature is a great way to build a stash of tax-free dollars. For low paid workers the Roth option may make sense if they think they won’t be low paid forever. Regardless, building the Roth option into your plan document shouldn’t cost anything more on an ongoing basis and might just be appreciated by your employees.
6. Convert 401(k) Balances To Monthly Income: It’s a simple but powerful concept. Have a 40 year old look at their $50,000 dollar 401(k) account balance and they can’t picture what that actually means to them in retirement. Tell that same employee that that money will only covert to a few hundred dollars of income each month when they retire, and it now becomes real. The governments TSP plan prints this monthly income projection right on page one of their participant statements. Ask if you your record-keeper can do the same or at least provide the same estimate to everyone by mail annually.
Flatter the people that can audit your 401(k) plan by copying theirs. The U.S. governments TSP plan can teach us all something about reducing 401(k) costs, reducing liability and improving participant outcomes. Isn’t it time we listened?