The retirement plan Uncle Sam has right
Hard to believe but true: The government offers employees a great plan, and you'd do well to emulate it
(Money Magazine) -- Considering the mess that Social Security and Medicare are in, the federal government is probably the last place you'd look for insights about retirement planning.
But I've got to hand it to the feds: When it comes to investing their own money for retirement, they really know what they're doing. In fact, the Thrift Savings Plan - the equivalent of a 401(k) plan for members of Congress and other government employees - is one of the best retirement plans around.
Alas, to be in it you must work for the government. But that doesn't mean you can't do what the feds do to make your retirement plan better.
Keep it simple
The Thrift Savings Plan doesn't try to dazzle participants with choices. There are just five core investment options:
By mixing and matching funds from this limited lineup, however, you can easily build a diversified portfolio appropriate for any stage of retirement planning.
If that's too much work, TSP also offers target-retirement funds that allow you to pick the fund with the date closest to when you plan to retire and bam! You get a premixed portfolio of the five core funds that gradually morphs more toward fixed income as you age.
The lesson here: Don't get distracted by all the funds your plan throws at you. Today the typical 401(k) plan has 19 investment options, and about one in 10 has more than 25. Employers may feel that they're doing you a favor by offering all that choice, but they're only making it harder for you to do the right thing since too much choice just leads to confusion.
Studies by researchers at Columbia University and the University of Chicago, for example, found that the more funds a 401(k) plan added to its lineup, the fewer employees signed up and the less money participants invested in stock funds.
The likely result: an account that's worth a whole lot less in the end.
The fact is, you'll find your retirement portfolio easier to manage, and probably a lot more effective, if you focus on just four core options: broadly diversified large- and small-cap domestic stock funds; an international fund that spreads its assets among major foreign markets; and a plain-vanilla bond fund.
Split your money among these basic building blocks, and you'll have all the diversification you really need. Plus, you'll have a much easier time keeping track of what you own.
Hold down costs
Talk about ironic. The same federal government that seems to regard the phrase "balanced budget" as an oxymoron is fanatical about keeping expenses down in its own retirement plan.
Think I exaggerate? Consider this: The most that any fund in the Thrift Savings Plan charges in annual expenses is 0.05 percent, or $5 for every $10,000 invested. That's about 75 percent less than even what notorious skinflint Vanguard routinely charges for its index mutual funds. Keeping costs at this miserly level can dramatically boost your savings over time.
Granted, there's no way you can duplicate TSP's paper-thin expenses in your plan. But you can keep expenses down by sticking with your plan's low-fee options like index funds and institutional portfolios, which can charge as little as 0.2 percent of assets.
If your 401(k)'s roster consists mostly of mutual funds with annual fees that fall into the 0.5 percent to 1.5 percent range, build the best portfolio you can with the least expensive funds.
If that means leaving out, say, a small-cap fund because it's too expensive, you can always round out your portfolio by investing in a low-expense small-stock fund in an IRA or another account outside your plan.
Think guaranteed income
When retirement time rolls around, the Thrift Savings Plan really shows how far ahead of the curve it is. That's because it allows you to invest a portion of your account's value in an immediate annuity that will pay a guaranteed income as long as you (or your spouse, if you wish) live.
Only one in five 401(k)s includes such an option as part of the plan, although some will direct you to an insurance firm that will sell you an annuity. At a time when fewer and fewer companies are offering a traditional check-a-month pension, a guaranteed payout can make for a more secure retirement - and a more satisfying one, as research shows that retirees who get monthly pension checks are happier in retirement than those who don't.
Fortunately, the odds that you'll be able to opt for a lifetime income option are improving. A growing number of 401(k)s have begun offering annuities through Income Solutions, an online service that allows 401(k) participants nearing retirement to shop for annuities at favorable institutional rates.
And Fidelity recently launched an annuity shopping service for the 401(k) plans it administers. If your plan doesn't offer this option, you can instead roll over a portion of your 401(k) balance to an IRA and then buy an immediate annuity on your own. To get the highest payout, shop online at immediateannuities.com and check out low-cost providers like Vanguard.
It's human nature, I suppose, that when something works really well, someone inevitably gets the urge to muck it up. In the case of the Thrift Savings Plan, the meddling comes in the form of two bills in Congress that seek to add a REIT investment option.
I've got nothing in particular against REITs. But I'd hate to see the plan stray from its elegant simplicity, which I regard as its biggest virtue - and its most important lesson for 401(k) investors everywhere.
My worry: Take away that simple approach, and it won't be long before TSP is just another sprawling government plan.
Are you nearing retirement -- or recently retired -- and want to make sure your portfolio is in top-notch shape? For an upcoming article, Money Magazine is offering free portfolio makeovers by a certified financial planner. E-mail your story (including specific financial concerns) to email@example.com.