TSP versus Vanguard, Which is a Better Choice?Posted by ahc99 on October 22nd, 2008

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I am currently a Federal employee and they provide a 401k plan called the TSP. Now I will definitely contribute into the TSP up to the federal matching rate, which is up to 5%. But my conundrum is whether it is financially savvy to increase my contribution (beyond the matching point) into the TSP or is it better to invest into Vanguard. Right now I am invested in both.

There’s many people that have never heard of a TSP, Thrift Savings Plan. It is a retirement savings plan for people that do/used to work for the Federal Government or the uniformed services. It is a defined contribution plan that is basically the same as any other 401k plan. But why am I comparing TSP to Vanguard? It’s because Vanguard has basically the lowest expense ratios for mutual funds. There’s no point to compare unless it’s to the best.

Now if you read any book about mutual fund investing you’ll know the best and simplest investment strategy is index investing because those have minimum expense ratios. So to compare apples to apples I dug through the TSP and Vanguard sites to chart their funds and compare their expense ratios.

TSP Fund TSP XP Ratio Vanguard Fund Vanguard XP Ratio
G Fund 0.015% No Equivalent Fund N/A
F Fund 0.015% Total Bond Market Index (VBMFX) 0.19%
C Fund 0.015% S&P 500 Index (VFINX) 0.15%
S Fund 0.015% Extended Market Index (VEXMX) 0.24%
I Fund 0.015% Developed Markets Index (VDMIX) 0.22%

Looking at these comparison you can see that TSP expense ratios are dirt cheap compared to Vanguard. In addition to that, the G Fund that TSP offers has no risk but still gives you returns, kind of like a free lunch; however, there is no equivalent fund in the Vanguard.

But another question is whether these TSP funds are comparable to the Vanguard funds. Are they representative of each other? Do they invest in basically the same assets? To compare that I pulled up the yearly returns between the two funds and found this:

Year F Fund VBMFX C Fund VFINX S Fund VEXMX I Fund VDMIX
1999 -0.85 -0.8 20.95 21.1 35.49 - 26.72 -
2000 11.67 11.4 -9.14 -9.1 -15.77 -
 -14.17 -
2001 8.61 8.4 -11.94 -12.0 -9.04 -9.2 -21.94 -22.0
2002 10.27 8.3 -22.05 -22.2 -18.14 -18.1 -15.98 -15.7
2003 4.11 4.0 28.53 28.5 42.92 43.4 37.94 38.6
2004 4.30 4.2 10.82 10.7 18.03 18.7 20.00 20.3
2005 2.40 2.4 4.96 4.8 10.45 10.3 13.63 13.3
2006 4.40 4.3 15.79 15.6 15.30 14.3 26.32 26.2
2007 7.09 6.9 5.54 5.4 5.49 4.3 11.43 11.0

Looking at the above chart it shows that they are similar, with only a few differences each year. So in the long run, they are comparable to each other.

So overall, when you are saving for retirement, you should come out on top when investing into a TSP since they have the same returns as Vanguard but are much cheaper to own. Thus, it is better to put more money into the TSP than Vanguard. Of course, if you’re not a federal employee then you’re outta luck!

Filed under: Investing, Retirement | 4 Comments

Retirement Fund Limits Investment: Washington Mutual In Danger?Posted by ahc99 on September 19th, 2008

A friend of mine recently got a letter from her Retirement Plan Administrative Committee about a policy change towards Washington Mutual investments. A reprint of the letter is shown below:

September 1, 2008

WASHINGTON MUTUAL BANK FUND POLICY CHANGE

Dear Participant:

As you may be aware, there have been recent news headlines regarding the financial stability of banking institutions due to the continuing deterioration of the housing market. The Horizons Plan Administrative Committee (PAC) has been monitoring this situation and has adopted a new policy that limits individual participant investment in the Washington Mutual bank fund to $250,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation (FDIC).

Bank Fund Investment Capped at the FDIC Retirement Account Limit

The PAC provides a bank fund as a conservative investment option whose principal feature is the insurance provided by the FDIC. The FDIC insurance coverage for all retirement deposits (e.g., 401(k), 457, IRA and/or Keogh accounts) at the same bank is a total of $250,000. This is significant because your deposits, dollar for dollar, including principal and any accrued interest, will be made available to you up to $250,000 in the event of a bank failure. However, any amounts exceeding the insurance coverage limit are subject to loss.

Effective August 29, 2008, investments in the Washington Mutual bank fund are limited to $250,000. Any transfers, contributions or interest earnings that exceed the $250,000 limit will be transferred to the [redacted] County Stable Income Fund. You will retain the discretion to allocate your assets, including any amounts transferred to the Stable Income Fund, among the available investment options, but you will only be able to invest up to the $250,000 limit in the Washington Mutual bank fund. This policy maintains the objective of the bank fund, which is to provide a reasonable rate of return with FDIC insurance coverage. No action is required by you.

The PAC adopted this policy because of concerns about Washington Mutual’s exposure to underperforming mortgages, or mortgage backed securities which has negatively affected its financial position. You may continue investing up to the $250,000 cap in the Washington Mutual fund, which the PAC will continue monitoring. In addition, the PAC will be conducting a search for additional FDIC-insured or U.S. Treasury products so you can have the opportunity to invest additional assets in the bank fund in the future.

Information regarding the Washington Mutual bank fund and other investment options in Horizons is available on the Plan’s Web site at [redacted]. In addition, participants may contact the Participant Service Center. Representatives can be reached at [redacted] and are available Monday through Friday between the hours of 7:00 a.m. and 5:00 p.m. Pacific Time.

Sincerely,

[redacted]

Chair, Horizons Plan Administrative Committee

I find this to be very interesting. Apparently even retirement funds are now limiting their investments in Washington Mutual out of fear that they will indeed go bankrupt and not be able to pay up. They are only allowing investments up to the insured FDIC amount of $250,000. Thus, any amount that has exceeded $250,000 will be transferred to another fund, lessening the the total amount of retirement investments in Washington Mutual. This should have large ramifications for Washington Mutual because they are already in desperate need of short-term market funding. This is only going to pour salt on the wound and exacerbate the already precarious situation they have found themselves in.

Filed under: Investing, Recession, Retirement | No Comments