Sorry, TSP Investors, the Mutual Fund Window Sucks

The Thrift Savings Plan (TSP) is the largest defined contribution 401(k)-style retirement plan in the world with millions of US government employees and armed services personnel participating. The TSP started in 1986 and slowly added a few investment options over the years, but since 2001 it has been chugging along with just five core fund options. This limited selection has earned the TSP praise for its simplicity and low fees rivaling passive indexing giants like Vanguard, as well as criticism for not allowing participants more control over their retirement funds.

The board that manages the Thrift Savings Plan has been slowly moving along with a plan to implement a “mutual fund window” into the TSP, which is effectively a pass-through to a self-directed brokerage account that will unlock access to thousands of new mutual fund options. Any fund you can find in your IRA or brokerage accounts, you’ll now be able to buy in your TSP! I received an email a few days ago telling me the mutual fund window would be going live in June 2022.

As far as 401(k) plans go, the TSP gets a lot more right than it gets wrong. My biggest criticism of the TSP is that the international fund (I Fund) offering is pretty terrible, covering less than 60% of the total international stock market due to tracking the MSCI EAFE index. My primary goal is that of the ultra-passive, globally diversified index investor — I want to own every publicly traded company in the world at its respective market capitalized weight. To achieve this with the I Fund, it means I need to buy additional funds outside of the TSP which track international small cap stocks and emerging markets in order to “complete” the missing pieces of the I Fund.

When I first heard rumblings of the mutual fund window a couple years ago, I was excited for the potential of buying a fund like Vanguard’s Total International Stock Index Fund (VTIAX) using it. No longer would I need the complexity of buying and rebalancing extra funds outside of my TSP to approximate a total international fund!

A few days ago when I got an email telling me the TSP mutual fund window was finally coming in June 2022, I went to check out the details. I quickly realized that the mutual fund window absolutely sucks, and concluded that nobody should use it.

Fees and expenses in the TSP mutual fund window

Several fees and expenses will be placed on those who choose to use the mutual fund window. Let’s take a quick look at all of them:

  1. Fees and expenses imposed by the specific mutual fund(s) in which the participant chooses to invest.
  2. An annual maintenance fee of $95.
  3. An administrative fee designed to guarantee that the availability of the mutual fund window will not indirectly increase the share of TSP administrative expenses borne by participants who choose not to use the mutual fund window. This fee will start at $55 per year, but will be re-calculated every three years based on actual expenses.
  4. A per-trade fee of $28.75.

Obviously the first rule is completely fair — one would expect to pay the same expense ratio advertised by their chosen investment fund which is borne by all investors in the fund regardless of where they purchased it.

How terrible the second and third fees are (which sum to $150 annually) completely depends on the size of your TSP. If you’re investing just $10,000 through the mutual fund window, this is equivalent to an additional expense ratio of 1.5%, which is quite ridiculous; if you’re investing $250,000 through the window, the $150 fee is an additional expense ratio of 0.06%. The late Jack Bogle was fond of saying, “In investing, you get what you don’t pay for. Costs matter,” referencing the fact that investment fees are directly eating into the compounding returns achieved by investors.

The final fee is the worst of all, the charge of $28.75 per trade! There is zero reason to pay this in an era with many brokerages like Vanguard and Fidelity offering commission-free trades on their own low cost passive index funds. This trading fee essentially makes it impossible to Dollar Cost Average into any investment in the mutual fund window with your biweekly TSP contribution without racking up huge costs, as this would cost you $747.50 in trading fees per year, per fund.

Min/max investment restrictions in the TSP mutual fund window

If the fees weren’t bad enough, the TSP will additionally place several restrictions on both the minimum and maximum investment balance of participants who choose to utilize the mutual fund window. They claim this is done because it “will allow access to funds that are not as diversified as the TSP core funds and therefore may expose participants to greater market risk.” Here are those restrictions:

  1. The initial amount transferred into the mutual fund window must be at least $10,000.
  2. The portion of a participant’s account invested through the mutual fund window may not exceed 25% of their total TSP account balance.
  3. The combination of the above two restrictions requires a minimum TSP balance of $40,000 before an investor can utilize the mutual fund window.

These restrictions make my desired use case for the mutual fund window totally impossible. I can’t mirror a total world stock portfolio by purchasing a total international stock market fund through the mutual fund window, as currently international (ex-US) stocks make up 40% of the world market capitalization.

The mutual fund window sucks, and you shouldn’t use it

Regardless of your investing philosophy, there is zero reason for using the TSP mutual fund window simply because the fees are a ludicrous rip-off. You can purchase the same mutual funds or ETFs outside the TSP for free at Vanguard, Fidelity, Charles Schwab, and probably a dozen other brokerages. Why would anybody spend $28.75 of their hard-earned money each and every time they want to add money to their investment funds or re-balance their portfolio?

I think the board implemented these fees and restrictions to discourage people from day-trading their TSP, or betting their entire retirement on a single risky investment like a cryptocurrency ETF. They describe the window as being “intended for TSP participants who are experienced investors.” However, the end result of treating investors like children is a completely kneecapped, rip-off feature that nobody should use. Ironically, experienced investors know not to touch fees like that with a 10 foot pole!

The mutual fund window gets ONE thing right!

The only good part about the mutual fund window is that a guiding principle of its development was that no costs should be incurred by TSP investors who choose not to utilize it. We get to continue enjoying low expense ratios of between 0.043% and 0.059% on our core investment funds.

My TSP investing strategy going forward

Since the mutual fund window is terrible, my TSP investing strategy remains the same as it was prior. My TSP is one piece in my wider investment objective for my portfolio which is to own every publicly traded company in the world at its respective market capitalized weight, similar to a total world equity fund like Vanguard’s VTWAX. Currently I hold 46% C Fund, 16% S Fund, and 38% I Fund. To meet my investment objectives, I need to emulate a total international fund by using the I Fund as my core international holding, and adding back the missing components in their proper ratios with my other investments outside of the TSP.

If you want to follow the same strategy as me, luckily I’ve previously done all of the math required on which funds to hold outside the TSP and in which percentages to complete your I Fund Holdings. That article also includes a link to a spreadsheet tool that I made which makes the process much simpler! A little bit of arithmetic to save big on fees is a no-brainer to me.

Questions? Additional thoughts? Leave a comment below!