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Nobody's happy with employer-sponsored retirement plans right now. Workers have lost huge portions of their savings in 401(k) plans. Policymakers want better options to help people save for retirement. But amid all the challenges that many workers face, one retirement plan already exists that could serve as a great model for anyone seeking 401(k) reform.
Unfortunately, you won't find that solution in the private sector. Employers have been cutting back on their contributions to 401(k) plans at an alarming rate, with companies such as FuelCell Energy (Nasdaq: FCEL ) and Hurco (Nasdaq: HURC ) joining hundreds of others that have scaled back or eliminated employer matching contributions.
But there's one plan where matching contributions haven't been threatened, and where it's impossible to criticize investment options for their high costs. The federal government's own Thrift Savings Plan (TSP) has a lot of positive attributes, and even if you can't take advantage of it yourself, it can at least stand as a model for other plans to emulate.
The TSP is the retirement savings option given to federal employees, including members of the military and civilian government. Technically, it's not a 401(k) plan, but it acts a lot like one: The same 2009 contribution limits of $16,500 for those under 50, and $22,000 for those 50 and older, apply to both, and you get the same tax advantages that 401(k) plans offer to private-sector employees.
From the standpoint of how to invest your money, the TSP doesn't give you the largest number of investment choices. But the five options it does offer span a huge range of investments:
- The G fund acts as a short-term, principal-protected investment option, but offers participants a return more similar to that of a long-term government bond. In essence, the fund resembles the stable-value options that some 401(k) plans provide, but without the risks involved.
- The F fund is a fixed-income option that tracks a broad benchmark of government, mortgage-backed, and corporate bonds.
- The C fund tracks shares of large-cap domestic stocks such as Goldman Sachs (NYSE: GS ) , McDonald's (NYSE: MCD ) , and other companies included in the S&P 500 index.
- The S fund gives investors exposure to U.S. stocks outside the S&P 500, tracking what used to be called the Wilshire 4500 index. That index includes companies like Visa (NYSE: V ) , Mosaic (NYSE: MOS ) , and First Solar (Nasdaq: FSLR ) that aren't in the S&P.
- The I fund allows participants to make international investments. The fund tracks the popular MSCI EAFE index of developed foreign stock markets.
In addition, the TSP offers lifecycle funds that automatically allocate money among each of these options. All you need to do is pick an appropriate target retirement date that meets your needs, and the fund handles the rest.
Low fees and great features
Perhaps the best thing about the TSP is its low fees. Despite the fact that the plan operates without taxpayer support, investment costs were a ridiculously low 0.015% for the most recently reported 2007 plan year. The combination of index funds and using forfeited matching contributions to fund plan expenses allows the TSP to keep costs low.
Moreover, many federal employees are eligible for employer contributions. In addition to an automatic 1% contribution, employees can earn further contributions amounting to a maximum of 5%. Although military personnel don't generally earn a match, the capacity exists for certain specialized occupations to receive designations that make them eligible for matching.
Match the TSP
The TSP serves as a model that other employers should follow. The commitment to low fees, a small yet broad range of investment options, and responsibility to supplement employees' retirement savings are all positives that can lead to higher morale and financial security. If your employer does anything less for you, you should consider emulating some of the attributes of the TSP with your own money -- or lobby your company to do so, before people conclude that the 401(k) system is truly broken beyond repair.
For more on trying to salvage your retirement savings: