TSP versus Vanguard, Which is a Better Choice?

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!

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