Thread: FRAUD in the TSP Rules re Rebalancing Account Holdings

FRAUD in the TSP Rules re Rebalancing Account Holdings:

All TSP account holders are being significantly disenfranchised and harmed by the provisions that account for transactions within a TSP account.

In late December 2007early January 2008, the TIB/TSP perpetrated the fallacy that "EXCESSIVE TRADING" costs were being induced by a 'few' TSP account holders (I believe I recall the percentage stated by TIB as <7% of all TSP account holders), and that costs were being unduly realized by all members as a result. This is a material misstatement intended to defraud.

In the proposed CFR, the TIB/TSP took the position that these "EXCESSIVE TRADING" transaction costs were being born by ALL TSP members. This is true on two counts. And, as discussed at the end of this posting, it may not be realized at all by the TSP.
First, realized trading fees are spread to all TSP account holders as part of the annual costs for managing the funds.
Second and more importantly, the public still does not realize that the TSP forces an entire TSP account portfolio to be rebalanced for if less than 100% of the TSP account were being rebalanced/traded. Why, you ask? It appears that the answer may be to defraud the TSP account holders and hide the TIB’s/TSP’s excessive cost structure for managing our TSP retirement savings plan, and that trading costs are nominal.

Recall that the TIB/TSP implemented the ‘TRADING RESTRICTIONS’ in or about 2008 April. Further, Congress authorized those changes as part of the Code of Federal Regulations (CFR's) that govern the TSP.

The TIB/TSP failed to advise that the CFR's don't permit rebalancing of a TSP account the way that the ERISA et al permit rebalancing in a public pension (i.e., not a private or a Government pension). Specifically, ERISA and the Internal Revenue Code (based on PUBLIC accounting standards and PUBLIC law) provide for a P-A-R-T-I-A-L rebalancing of an ERISA governed 401(k)/404(c) retirement savings plan.

CASE EXAMPLE:

Simplifying assumptions - ORIGINAL CONTRIBUTIONS and COST BASES:
1. Three investment funds existed when initial contributions were made aa-fund, bb-fund, and cc-fund.
2. Total lifetime contributions of $1,000.00 were made, with $500.00 of contributions made to aa and bb, but none to cc.
3. There were no 'agency automatic' or 'employer matching' contributions.
4. $500.00 of contributions to aa-fund was made on one specific date.
5. Each original share of aa-fund was bought at a cost basis of $10.00 per share.
6. The original contribution produced 50 aa-fund shares.
7. $500.00 of contributions to bb-fund was made on one specific date.
8. Each original share of bb-fund was bought at a cost basis of $10.00 per share.
9. The original contribution produced 50 bb-fund shares.
10. No shares of cc-fund were originally bought.

VALUE Of TSP Account Prior to Rebalancing:
11. NOW, the market value of an aa-share is $20.00, and TSP member account now has 50 aa-shares valued at $1,000.00.
12. NOW, the market value of a bb-share is $40.00, and TSP member account now has 50-bb-shares valued at $2,000.00.
13. As such, TSP member account has a value of $3,000.00.

Rebalancing under TSP Rules:
14. TSP account holder DIRECTS A REBALANCING so that her account will own $1,000.00 of cc-fund, which trades at $25.00 per share, as well as $1,000.00 of shares in the bb-fund, and $1,000.00 of shares in the aa-fund (i.e., equal value allocated to each fund).
15. TSP rules implement the rebalancing transaction as follows:
a. TSP sells entire portfolio, realizing $3,000.00 of cash to allocate
b. TSP thereafter purchases $1,000.00 aa-fund: 50 shares of aa-fund purchased now @ $20.00 per aa-share (sensitivity of return to a change of price in aa-fund shares became HALVED from 1 penny out of $10.00 to 1 penny out of $20.00)
c. TSP thereafter purchases $1,000.00 bb-fund: 25 shares of bb-fund now trading @ $40.00 per bb-share (sensitivity of return to a change of price in aa-fund shares became QUARTERED from 1 penny out of $10.00 to 1 penny out of $40.00)
d. TSP thereafter purchases $1,000.00 cc-fund: 40 shares of cc-fund now trading @ $25.00 per cc-share

Here’s the example for if TSP acted as if it Public Accounting were required and the ERISA were the governing law to the plan, just as it is in 401(k), 404(c) and other ‘public’ (as opposed to Government) retirement savings plans.

14. TSP account holder DIRECTS A REBALANCING so that her account will own $1,000.00 of cc-fund, which trades at $25.00 per share, as well as $1,000.00 of shares in the bb-fund, and $1,000.00 of shares in the aa-fund (i.e., equal value allocated to each fund).
15. Plan Rules under ERISA would account for the rebalancing transaction under a First-In/First-Out method from each fund that is a source of funds, either directed by the participant (i.e., a 404(c) plan), or by the plan rules (i.e., a 401(k) plan). Assume that the newly purchased cc-shares are funded solely from the sale of bb-shares.
a. The fund manager/custodian would sell enough bb-shares to produce $1,000.00 from principal and realized net gains(losses). This would cause a sale of 25 bb-shares at $40.00 each ($10.00 original basis, $30.00 realized gain).
b. After the rebalancing, the TSP account holder would own:
i. $1,000.00 from 50-aa shares, with each aa-share trading at $20.00 ($10.00 per aa-share original cost basis, and $10.00 per aa-share unrealized gain).
ii. $1,000.00 from 25 bb-shares, with each bb-share trading at $40.00 each ($10.00 original basis, $30.00 realized gain).
iii. $1,000.00 from 40 cc-shares, each newly bought and having a cost basis of $25.00 per cc-share.

Here’s where the abuse and apparent fraud of TSP account holders occurs:

Had the TIB/TSP only accounted for transactions the same way the public accounting requires for ERISA governed public retirement savings plans, then the TSP Account holder would realize a major personal benefit:
Greater sensitivity to return on each fund holding due to the retained much lower original cost basis of aa-shares ($10 versus $20 is a halving of sensitivity of return) and bb-shares ($10 versus $40 is a 75% reduction to sensitivity of return).

Think about this:
What if the TSP isn’t really selling a participant’s entire portfolio, and is instead, selling as would be under ERISA and also manufacturing an up-basis to each TSP account that effected a rebalancing?
What if the TSP is falsely billing each TSP participant for unrealized trading fees for the portions of a TSP account that doesn’t need to be sold/is artificially sold and up-based in price?

At the very least, there was a fraud perpetuated under the TIB's positions within the original proposed CFR, and its replies to comment. Enough!

TSP account holders want and deserve trading and accounting same as similar retirement savings plans, which get governed under ERISA. ERISA plans also get transparency. Let’s see what’s behind the curtain at Oz!

Let's find out who sits on the appropriate committees and stop this fleecing of the Government employee/retiree/beneficiary to the TSP.

StopTSPWasteFraudAbuse