TSP's Mutual Fund Window Gets Icy Reception

With the passage of tobacco regulation earlier this summer, Congress closed a number of doors. Several months later, regulators are deciding whether to open a window.

At a hearing Tuesday, members of the House discussed the possibility of allowing federal employees to put their retirement money in mutual funds. This consideration stems from the 2009 Family Smoking Prevention and Tobacco Control Act, which authorizes a so-called mutual fund window for the Thrift Savings Plan.

As part of the tobacco bill, Congress gave the administrators of the TSP, which is essentially a 401(k) plan for federal employees, the option to allow participants to invest in preapproved mutual funds. But given the icy reception the concept received from lawmakers and union representatives alike on Tuesday, it appears unlikely to gain much traction.

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Currently, federal employees can use their retirement accounts to invest in a number of private funds offered exclusively through the TSP, but they cannot select run-of-the-mill mutual funds. And interested parties appear to be leaning toward keeping it that way, arguing that the window could open investors up to a number of new risks. "I fail to see what the advantage was, given the volatility of the market," Rep. Gerry Connolly, a Virginia Democrat, said in an interview with U.S. News. "We need to be cautious and prudent."

Connolly sits on the Oversight and Government Reform Subcommittee on the Federal Workforce, Postal Service, and the District of Columbia. At Tuesday's subcommittee hearing, his arguments found a largely sympathetic audience. "We believe that in almost every case, federal employees who would choose to utilize this mutual fund window would lower their overall rate of return on their savings, not only by exposing themselves to unnecessary risk, but also by paying the large fees and 'load' charges that mutual funds impose on investors," J. David Cox, the national secretary-treasurer for the American Federation of Government Employees, said in his prepared subcommittee testimony.

Connolly calls this sentiment particularly revealing. "I think it would be a different matter if [employee advocates] were insisting that they want this," he says. "In principle, having more options is a good thing, [but] I think the experience of the last five or six years has given everyone pause."