Final Ruling: No More TSP Frequent Trading
April 24, 2008
Day traders and market timers are a thing of the past -- at least when it comes
to the Thrift Savings Plan.
The Federal Retirement Thrift Investment Board officially published its
amended interfund transfer (IFT) regulations today to limit the number of
interfund transfer requests to two per calendar month. After a participant
has made two interfund transfers in a calendar month, the participant may make
additional interfund transfers only into the Government Securities Investment
(G) Fund until the first day of the next calendar month. (To read the complete
ruling and commentary as published in the Federal Register, click here)
The rule amendment was targeted at federal employees who switch their
Thrift Savings Plan investments every few days in hope to make gains by beating
the stock market.
Last year, the
TSP raised concerns that frequent trading activity from a small percentage
of TSP participants -- about 3,000 -- was driving up the costs and thus diluting
the returns of the rest of the 3.8 million participants.
There has been a flurry of debate on
the subject since, including opposition from nearly 4,000 TSP participants who
signed a petition coordinated by an Internet-based advocate group,
TSPShareholders.org.
The TSP received official comments from about 300 opposed to the
restrictions and 30 who supported them.
Most of those opposing the restriction have expressed they felt the
additional costs the TSP has incurred because of frequent trading are not a
significant amount compared to the more than $200 billion of assets in the
funds. Opponents have also expressed that TSP participants should
have the right to change their allocations in funds as much as they want,
even if it means paying an additional fee per trade.
But the TSP sharply rejected these assumptions.
"Those individual respondents who have personally made frequent interfund
transfers and oppose the proposed limits display a fundamental misunderstanding
of the statutory TSP design," the TSP ruling states. "By misappropriating
language used in the capital markets (buys, sells, trades), some TSP
participants give the impression that their frequent interfund transfers are
trades in and out of the markets which affect only their own funds. This is
incorrect. All TSP assets are in a pooled investment which is designated by
statute as the Thrift Savings Fund"
As an example, the TSP rule cited that frequent trading contributed
to a one-day $9.5 million increase in costs in the International
(I) Fund on August 16, 2007 -- and this cost was absorbed by
all participants in the I Fund.
"The Thrift Savings Plan was created to offer passive long-term investments
designed to improve the retirement security of federal employees", according to
the TSP rule. "As a result of analysis performed in 2007, it became clear
that a small number of TSP participants were pursuing 'market timing' active
investment strategies in the TSP. These activities were diluting the earnings of
the long-term investors, and adversely affecting the ability of TSP managers to
replicate the performance of selected indexes as required by law."
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