If you’ve read my article TSP – A Great Retirement Vehicle, then you know that I believe the TSP is a great way for many government employees to invest for retirement. However, there are also several drawbacks to investing in the TSP.
Drawbacks to investing in the Thrift Savings Plan
Limited investment options. The first, having only 5 investment choices (not counting Life Cycle Funds) is a benefit and a drawback. The simplicity that makes investing in the TSP can also be a detriment to those who have a better understanding of investing or would like to further diversify beyond a few index funds. With the TSP you can not invest in REITs, or individual sectors such as technology, precious metals, healthcare, emerging markets, etc.
Difficult to track investments in most home accounting software. The second drawback is the inability to link to home finance programs such as Quicken, or MS Money. You can manually input your data into these programs, but there is no automatic download feature. So you must manually change it every time you invest, rebalance your portfolio, etc. That can be a pain, but it’s necessary if you want to have a clear picture of your net worth, asset allocation, performance, etc. (The TSP states the reason they do not offer this feature is to maintain low costs.)
Limited availability of matching funds. Unless you are civil service, you do not get matching funds. In that case, it is usually better to max out your Roth IRA before contributing to the TSP.
No cost basis tracking. The TSP site does not track cost basis. This is important to know for tracking purposes and monitoring your investments. You can do this manually, but if you did not do this from the time you began investing in the TSP, you will never get a truly accurate picture. A work around for this would be to use your current value as a cost basis, then track from now on. This will not give you a true cost basis from inception, but it will allow you to track annual growth. (But the TSP has well known index funds so they should be easy to track manually).
You can no loner contribute when you leave government service. Once your service with the government is through, you can no longer contribute to the TSP. However, this is just like any other 401k plan. You do have the option to leave your funds within the TSP, you can roll them into a different 401k plan, or roll them into a traditional IRA.
All in all, I still think the TSP is a good way to go for government employees looking for an easy to use and inexpensive retirement system.
