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The Evolution of the TSP

The Thrift Savings Plan (TSP) is a retirement savings plan for federal government employees and uniformed services members.  Established by Congress in 1986, the TSP offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans.

The TSP is a defined contribution plan. In other words, it helps participants accumulate a retirement nest egg, the size of which depends on how much money they put into their accounts during their working years, along with any agency or service contributions and the investment earnings accumulated over time. The TSP is administered by the Federal Retirement Thrift Investment Board (FRTIB).

History of TSP Investments

The TSP began in 1987 with just one fund — the G Fund, a Government Securities fund (i.e. a government bond fund).  In 1988, the C Fund (Common Stock Index fund) and F Funds (Fixed Income Index fund) were added, which enabled exposure to U.S. large company stocks and corporate bonds.  Not until 2001 were more funds added:  the S Fund (Small Cap Stock Index fund) and the I Fund (International Stock Index fund).

In 2005, the TSP introduced target date funds— the L Funds (Lifecycle funds).  Each of the L Funds is a diversified mix of the five core funds, which automatically reallocates assets from more risky stock funds (the C, I, and S Funds) into less-risky income funds (the F and G Funds) as an employee approaches the target date of the fund.  Originally offered only in 10-year increments, in July 2020, the TSP introduced new Lifecycle Funds in five-year increments.  There are now 10 Lifecycle funds from which to choose.

The most recent addition to the TSP investment mix occurred in June 2022 with the advent of the Mutual Fund Window (MFW) option. The MFW option allows TSP participants to invest a portion of their TSP savings in a choice of available mutual funds. The MFW offers almost 5,000 new funds, including funds from iShares, Vanguard, State Street, Blackrock, Fidelity, and many others. Although it is part of the TSP, the MFW requires the opening of a separate investment account provided by the TSP’s MFW vendor.  Once the account is established, participants can buy, sell and exchange mutual funds selected from those available.

History of TSP Mechanics

From 1987 until 2000, contributions on the federal government side were limited to 5% of salary for CSRS employees and 10% of salary for FERS employees.  Beginning in 2000, the percentages crept up by 1% a year, and in 2006, the TSP lifted the percentage limitations altogether.  Now individuals may contribute up to the same IRS elective deferral amount used for 401k’s and 403b’s.  (For 2023, the annual contribution limit is $22,500, with an additional $7,500 catch up contribution for those over age 50.)  Since the TSP’s inception, FERS employees have been eligible for government matching contributions, and CSRS employees have not.

The TSP has always provided each employee with an automatic 1% agency contribution.  Originally, employees had to wait to contribute from their salary to the TSP and to be eligible for any additional employer match (1% for the first 3% contributed and ½ % on the next 2% contributed).  In 2005, employees became eligible to contribute to the TSP at any time (no waiting period), and in 2009, the Federal Retirement Thrift Board eliminated the waiting period for the employer match.  New employees were then automatically enrolled in the TSP at a contribution level of 3%, with the funds (and any employer match) invested in the G fund. Since 2020, new civilian employees and service members are automatically enrolled in the TSP with a 5% deduction from their gross pay being deposited into the age-appropriate Lifecycle (L) Fund, unless they make another choice or opt out.

Today’s employees can change their contribution allocations daily, but it has taken a long time to have this flexibility. Early TSP participants had to wait for one of the TSP’s two annual open seasons to change their investments. 

Withdrawals from the TSP have also become much more flexible over time.   Originally, monthly payments, once set, could not be changed.  Currently, there are three basic methods of taking distributions from a TSP account as a separated or beneficiary participant:

  • installment payments, which may be monthly, quarterly, or annual and may be a fixed dollar amount or based on life expectancy,
  • partial or total distribution, and
  • annuity purchases.

In light of changes to the federal and military pension systems in the past few decades and the need for employees to be saving toward their own retirement, the TSP has been a benefit to federal employees and members of the armed services.  As of December 2021, the participation rate in the TSP was 94.6% for civilians and 78.1% for uniformed services, and the TSP had around $800 billion in assets under management for its 6.5 million participants.  Hopefully, the Federal Retirement Thrift Board will continue to add new investment options and to improve the mechanics for TSP participation in the future to allow participants to maximize their retirement nest eggs and access their funds easily when needed.  See more discussion on these items in our related post, “Pros and Cons of the TSP.”


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