Tobacco, the Thrift Savings Plan and FERS: What Is the Link Between Them?   By Ralph Smith Friday, March 13, 2009 Click here for more articles by Ralph Smith

What does the regulation of tobacco, the structure of the Thrift Savings Plan and credit for unused sick leave for employees under the FERS retirement system have in common?

They are all in the same bill that in the House of Representatives entitled the "Family Smoking Prevention and Tobacco Control Act." (HR 1256) The purpose of this bill is "To protect the public health by providing the Food and Drug Administration with certain authority to regulate tobacco products."

The bill has 143 co-sponsors. The language on the Thrift Savings Plan and credit for unused sick leave is about the same as that in another bill before the House in HR 1263 and entitled the "Federal Retirement Reform Act of 2009."

The primary purpose of the bill (HR 1256), regulating tobacco products, does not have much of direct interest to most readers. But, stuck on the end of the bill is Title IV and it is entitled "Thrift Savings Plan Enhancements." And, under Title IV (again, stuck on at the very end) is a section entitled "Credit for Unused Sick Leave" which has very little to do with the TSP provisions of this bill.

Readers are free to ruminate on why these topics are all thrown together in one piece of legislation. For more of an explanation, check out "Funding Tobacco Legislation by Changing the Thrift Savings Plan."

Here is why these provisions could be important to federal employees if it passes into law.

First, the credit for unused sick leave. Similar legislation was passed by the House last year but it was never enacted into law. The language in the new bill is similar. The language in the current bill reads:

"...in computing an annuity under this subchapter, the total service of an employee who retires on an immediate annuity or who dies leaving a survivor or survivors entitled to annuity includes the days of unused sick leave to his credit under a formal leave system, except that these days will not be counted in determining average pay or annuity eligibility under this subchapter."

In plain English, this means that federal employees who are under the FERS system would count their unused sick leave toward the computation of their retirement annuity in the same manner as employees under the Civil Service Retirement System (CSRS).

Second, the implications in this bill for the Thrift Savings Plan.

It would provide for automatic enrollment in the Thrift Savings Plan (section 402) although a person can still elect not to participate in the TSP.

Also, the bill directs the TSP to "provide for the inclusion in the Thrift Savings Plan of a qualified Roth contribution program...." This would have implications for TSP investors and could provide a substantial tax savings for those who are qualified to participate in a Roth program.

Finally, the bill would give the TSP the option of setting up a "self-directed investment window." The restrictions on this option would be limiting these investment options to--

"(i) low-cost, passively-managed index funds that offer diversification benefits; and

`(ii) other investment options, if the Board determines the options to be appropriate retirement investment vehicles for participants."

The administrative expenses of this self-directed investment window would have to be paid by those who have elected to participate in the program.

Are these changes to the TSP desirable?

For some TSP investors, they are likely to be a good addition to the TSP. There would be more investment options and more opportunities to enhance your future retirement income (or, perhaps to invest in more risky investments with your retirement funds depending on your perspective.)

One of the strengths of the current TSP is its simplicity. If a program is easier to understand, more people will use it. The TSP is described by some financial writers as a "platinum" program that is better than the vast majority of the 401(k) retirement plans available to private sector employees and, by a Newsweek financial writer as a "model" retirement program that should be emulated by other retirement plans.

The recent financial meltdown that has seen the value of stock holdings around the world has undoubtedly had an impact on retirement planning. This meltdown may have made legislators more receptive to making changes that give investors more flexibility. These changes may fall into this category of giving people more control over their retirement investments and, no doubt, some TSP investors would use the new options if they become available.

One other caveat. The TSP controls a large pot of money--in the neighborhood of $200 billion dollars. A large pot of money in front of Congress may make that money about as safe as putting a steak in front of a hungry dog and telling him not to eat it. There are a myriad of political reasons for Congress to tamper with the TSP. All of the reasons will be couched in politically correct terminology by smart, savvy people and shrouded with the intent of helping the public and enhancing your retirement investment. Pay close attention to what Congress does with the TSP as the pot of money begins to grow when the stock market recovers and the $200 billion dollars keeps on growing.

The proposed changes in the bill discussed in this column certainly seem reasonable and, while retirement funds in stock funds have diminished everywhere over the past two years,  the management of your TSP funds has been professionally handled. But, for future reference, see Money, Congress and Your TSP: Watch Out for Your Retirement Money and The TSP Pot is Growing Fast: Will Congress Resist the Political Opportunities? for how Congress may look at this large amount of money as it continues to grow.

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