TSP: It may be 2 years before Roth is offered - Military Retirement - Navy Times

TSP: It may be 2 years before Roth is offered

The top executive overseeing the Thrift Savings Plan said it will take a “minimum of one year, more likely two” to get a Roth investment option in place.

Congress stands poised to add a Roth option to the Thrift Savings Plan that would enable participants to make taxable contributions that could grow and be withdrawn at retirement tax-free. Currently, TSP investments are made tax-free and then taxed when they are withdrawn.

A Roth option will benefit those who have higher incomes during retirement — and, thus, would be in a higher income tax bracket — than during their military or federal careers. Service members, who enjoy significant tax breaks while in uniform, are among those most likely to benefit from a Roth option.

In a June 2 interview with Military Times editors and reporters, Federal Retirement Thrift Investment Board executive director Greg Long and external affairs director Tom Trabucco said the board is already talking to the military services and federal agencies about changes they will need to make to payroll systems to accommodate the Roth option.

“It is a big deal,” Long said.

The board also will have to figure out how best to help participants decide if a Roth option is right for them. Long said the board plans to study private-sector plans that offer a Roth option to see how they educate their participants.

Long said he was initially unsure whether a Roth option would be used widely enough to justify the costs of adding it, but changed his mind after seeing growing and sustained interest among service members and federal civilian employees.

Trabucco said Pentagon officials want to automatically enroll young, lower-paid military recuits into a TSP Roth plan, a change from their initial stance. The Pentagon previously had not supported automatic enrollment because service members don’t receive government matching funds for their TSP contributions, as most federal employees do.

Trabucco said TSP participation rates among federal civilians have ranged between 84 percent and 87 percent of those eligible for the last decade.

Congress is poised to approve a bill that would automatically enroll civilian employees and give them matching funds right away. Long said he hopes participation rates could climb into the low-90 percent range with automatic enrollment.

Enrollment rates among service members have been much lower, with the Navy topping the list in the mid-50 percent range. But Long said that if the Defense Department does automatically enroll new troops, that could help push enrollment from more than 4 million participants today to 5 million.

Long said that even though the TSP’s stock-based funds dropped in value over the last 1½ years because of the stock market crash, he is more confident than ever that the plan’s structure is sound.

“If you take a look at our Lifecycle Funds, our L Funds, and the performance of them relative to competing products [in the private sector], the performance of our [L] 2010 Fund in 2008 was down substantially less than most of the competing products out there,” Long said.

“That says … we did some things right,” Long said. “We took an appropriate level of risk for somebody planning on starting to draw down income in 2010, and maybe the marketplace didn’t look at it the same way we did. Even though it was a very difficult period, I think it demonstrated to us that we made some good decisions.”