I read Mr. Brad Bobb’s article on October 26 about TSP costs with interest. I would like to raise a few important points that I think FedSmith readers should also consider when making investment decisions for their retirement.
Two key factors for investors are the rate of return and the fees paid for that investment. The attached spreadsheet compares the investment returns that Mr. Bobb referred to.
Mr. Bobb has sometimes compared the TSP fund to a fund that tracks a different benchmark. For example, the Schwab SCHX tracks the total return of the Dow Jones US Large-Cap Total Stock Market Index which tracks 750 stocks. Fund C follows the S&P 500. In these cases, I put n / a because comparing the returns of 2 different indices is meaningless.
As you can see, when compared to comparable funds, the TSP returns are better almost every time.
Of course, yield comparisons alone don’t tell the whole story. It is essential that investors understand that non-TSP fund returns do not include other fees and expenses. TSP returns include all fees and expenses; others do not, and such fees and expenses can decrease or eliminate returns.
In addition to mentioning some funds that track different indices, Mr. Bobb doesn’t always compare apples to apples with the type of funds. This also produces a misleading comparison. In several cases, he compares TSP index funds with Exchange Traded Funds (ETFs). With ETFs, you pay a bid-ask spread on every transaction. It depends on the fund, but for Vanguard’s VOO, for example, the spread is on average 0.01%. It can be much higher if you buy / sell on a day of high volatility. This cost must be added to the expense ratio for that fund.
There may also be a premium / discount on the net asset value (NAV – the value per share of a mutual fund). The Vanguard BND had a small premium when we looked, which means you would be paying more than the NAV at the time of purchase. The Schwab SCHF had a hefty discount (0.70%) at the time of checking, which means a participant gets less than expected when you sell. These rewards / discounts change over time and depend on the market: if more people want to sell, the discounts go up and if more people want to buy, the rewards go up.
In addition to these costs, ETFs can have transaction fees depending on where an investor is trading.
If we look at index mutual funds, rather than ETFs, a different set of costs may apply. For example, the VOO ETF is also available as an Admiral share class (index mutual fund) at 0.04%, which is more expensive than the one quoted by Bobb. For any Vanguard share class, an investor pays $ 20 per year for each fund unless you have a total of $ 1,000,000 invested with Vanguard. On a $ 10,000 account, $ 20 per year is another 0.2%, which is significantly greater than the 0.043% TSP.
As noted, most fund families have funds with a range of spending ratios. Typically, “main funds” such as those listed are loss leaders. The family of funds is priced in the expectation that once a client buys an inexpensive basic fund, that client will also buy more expensive funds.
The TSP has no hidden costs. Fund C costs 0.043% if you have $ 1,000 or $ 10,000 or $ 100,000. This means that the returns on the spreadsheet are the actual returns seen by TSP participants, while the returns of the other Funds Mr. Bobb selected may or may not be the true return on an investment.
Kim Weaver is the Director of Foreign Affairs at the Federal Retirement Thrift Investment Board (FRTIB), the agency that manages the operation of the Thrift Savings Plan (TSP).
© 2022 Kim Tessitore. All rights reserved. This article may not be reproduced without Kim Weaver’s express written consent.