Federal Employees’ Retirement System:
The Role of the Thrift Savings Plan
Katelin P. Isaacs
Analyst in Income Security
January 11, 2011
Congressional Research Service
7-5700
www.crs.gov
RL30387
CRS Report for Congress
P
repared for Members and Committees of Congress
Federal Employees’ Retirement System: The Role of the Thrift Savings Plan
Summary
Federal employees participate in one of two retirement systems. The Civil Service Retirement
System (CSRS) was established in 1920 and covers only employees hired before 1984.
Participants in the CSRS do not pay Social Security payroll taxes and they do not earn Social
Security benefits. For a worker retiring after 30 years of federal service, a CSRS annuity will be
equal to 56.25% of the average of his or her highest three consecutive years of basic pay.
The Social Security Amendments of 1983 (P.L. 98-21) required federal employees hired after
1983 to participate in Social Security. Because the CSRS was not designed to coordinate with
Social Security, Congress directed the development of a new retirement plan for federal workers
hired after 1983. The result was the Federal Employees’ Retirement System (FERS) Act of 1986
(P.L. 99-335). The FERS has three elements: (1) Social Security, (2) the FERS basic retirement
annuity and FERS supplement, and (3) the Thrift Savings Plan (TSP).
The amount of the FERS basic retirement annuity is determined by three factors: (1) the salary
base, (2) the accrual rate, and (3) years of service. The salary base is the average of the worker’s
highest three consecutive years of pay. Under FERS, the benefit accrual rate is 1.0% per year of
service, or 1.1% for workers retiring at age 62 or later with 20 or more years of service. A worker
with 30 years of service retiring at age 62 will receive a FERS pension equal to 33% of the
average of his or her highest three consecutive years of pay, or about 32% of final annual salary.
The TSP is a defined contribution retirement plan similar to the 401(k) plans provided by many
employers in the private sector. The income that a retired worker receives from the TSP will
depend on the balance in his or her account. In 2011, employees covered by FERS or CSRS can
contribute up to $16,500 to the TSP. Employees aged 50 or older can contribute an additional
$5,500. Contributions of up to 5% of pay made by workers under FERS are matched by the
federal government. Workers covered by CSRS can contribute to the TSP, but they receive no
matching contributions.
The TSP is a key element of the FERS, especially for workers at the upper ranges of the federal
pay scale. The FERS basic annuity will replace about 32% of final salary for an employee retiring
at age 62 after 30 years of service. Because the Social Security benefit formula is designed to
replace a greater share of income for low-wage workers than for high-wage workers, Social
Security will replace just 14% of final annual pay for a worker retiring from a job at the GS-15
level at age 62 after 30 years of federal service. Social Security will replace 25% of final annual
pay for a worker retiring from a job at the GS-4 level at age 62 after 30 years of service.
Higher-wage federal workers need to contribute a greater percentage of pay to the TSP to reach
the same level of income replacement as lower-paid workers can achieve from just the FERS
retirement annuity and Social Security. Even at a relatively modest annual rate of return of 6.0%,
income from the TSP can replace about 37% of final pay for a federal employee who contributes
10% of pay over 30 years.
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Federal Employees’ Retirement System: The Role of the Thrift Savings Plan
Contents
Introduction ................................................................................................................................ 1
The FERS Basic Retirement Annuity .......................................................................................... 1
Retirement Age and Service Requirements ............................................................................ 1
Calculating the FERS Basic Retirement Annuity ................................................................... 3
Salary Base ..................................................................................................................... 3
Accrual Rate ................................................................................................................... 3
Social Security, and the “FERS Supplement” .................................................................. 3
Cost-of-Living Adjustments .................................................................................................. 4
The Thrift Savings Plan............................................................................................................... 4
Employee and Agency Contributions..................................................................................... 5
Maximum Allowable Thrift Savings Plan Contribution.......................................................... 6
Penalty on Early Withdrawals ............................................................................................... 6
Participant Loans ............................................................................................................ 7
Age-based Withdrawals and Hardship Withdrawals ......................................................... 7
TSP Investment Options........................................................................................................ 8
TSP Withdrawal Options ....................................................................................................... 9
TSP Participation Rates....................................................................................................... 10
Illustrations of the TSP’s Role in Providing Retirement Income................................................. 10
Estimated Replacement Rates for a 30-Year Employee ........................................................ 11
Estimated Replacement Rates for a 20-Year Employee ........................................................ 14
Workers Who Leave Federal Employment Before Reaching Retirement Age ....................... 17
The Thrift Savings Plan Enhancement Act of 2009.................................................................... 18
Conclusion................................................................................................................................ 19
Tables
Table 1. Minimum Retirement Age under FERS.......................................................................... 2
Table 2. Government Matching Rate on TSP Contributions by FERS Participants ....................... 5
Table 3. Annual Rates of Return for Thrift Savings Plan Funds.................................................... 8
Table 4. Illustration of Replacement Rates under FERS for an Employee Retiring at Age
62 After 30 Years of Service................................................................................................... 13
Table 5. Illustration of Replacement Rates under FERS for an Employee Retiring at Age
62 After 30 Years of Service................................................................................................... 13
Table 6. Illustration of Replacement Rates for FERS-Covered Employee Retiring at Age
62 After 20 Years of Service................................................................................................... 16
Table 7. Illustration of Replacement Rates for FERS-Covered Employee Retiring at Age
62 After 20 Years of Service................................................................................................... 17
Appendixes
Appendix. Administration of the Thrift Savings Plan................................................................. 20
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Federal Employees’ Retirement System: The Role of the Thrift Savings Plan
Contacts
Author Contact Information ...................................................................................................... 22
Acknowledgments .................................................................................................................... 22
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Federal Employees’ Retirement System: The Role of the Thrift Savings Plan
Introduction
Federal employees participate in one of two retirement systems. The Civil Service Retirement
System (CSRS) was established in 1920 and covers only employees hired before 1984.
Participants in the CSRS do not pay Social Security payroll taxes and they do not earn Social
Security benefits. For a worker retiring after 30 years of federal service, a CSRS annuity will be
equal to 56.25% of the average of his or her highest three consecutive years of basic pay.
Because the Social Security trust funds needed additional cash contributions to remain solvent,
the Social Security Amendments of 1983 (P.L. 98-21) required federal employees hired after 1983
to participate in Social Security. To coordinate federal pension benefits with Social Security,
Congress directed the development of a new retirement system for federal employees hired after
1983. The result was the Federal Employees’ Retirement System (FERS) Act of 1986 (P.L. 99-
335).
The FERS consists of three elements:
• Social
Security,
• the FERS basic retirement annuity and the FERS supplement, and
• the Thrift Savings Plan (TSP).
All federal employees initially hired into federal employment on or after January 1, 1984, are
enrolled in the FERS, as are employees who voluntarily switched from CSRS to FERS during
“open seasons” held in 1987 and 1998.1 Of 2,571,000 federal civilian and Postal Service
employees enrolled in federal retirement plans as of March 31, 2009, 2,131,000 (83%) were
participating in the FERS and 440,000 (17%) were under the CSRS.2
The FERS Basic Retirement Annuity
Retirement Age and Service Requirements
Federal employees are fully vested in the FERS basic retirement annuity after five years of
service. The earliest age at which a worker can retire under FERS was 55 for workers born before
1948. The minimum retirement age (MRA) under FERS began to increase in 2003 for workers
born in 1948, and it eventually will reach age 57 for those born in 1970 or later (see Table 1). In
2011, a worker who has completed at least 30 years of service can retire with an immediate,
unreduced annuity at age 56. An employee with 20 or more years of service can retire with an
immediate, unreduced annuity at age 60, and an employee with at least five years of service can
retire with an immediate annuity at age 62.3
1 Relatively few employees who were covered by CSRS chose to switch to FERS. Only about 5% of eligible employees
switched in 1987, and fewer than 2% switched in 1998.
2 Federal Retirement Thrift Investment Board, Quarterly Statistics, March 2009.
3 Members of Congress and congressional staff, federal law enforcement officers, firefighters, air traffic controllers,
and nuclear materials couriers can retire with an immediate, unreduced annuity at age 50 after 20 years of service or at
any age after 25 years of service.
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Table 1. Minimum Retirement Age under FERS
Year of Birth
Minimum Retirement Age
1947 or earlier
55 years
1948
55 years, 2 months
1949
55 years, 4 months
1950
55 years, 6 months
1951
55 years, 8 months
1952
55 years, 10 months
1953 to 1964
56 years
1965
56 years, 2 months
1966
56 years, 4 months
1967
56 years, 6 months
1968
56 years, 8 months
1969
56 years, 10 months
1970 or later
57 years
Source: 5 U.S.C. § 8412
Under FERS, employees (or former employees) who have completed 10 or more years of
government service can elect to receive a reduced retirement annuity at the minimum retirement
age. For those who choose this option, their annuities are permanently reduced by 5% multiplied
by the number of years between 62 and the individual’s age at the time the annuity begins. For
example, an employee who retires at 56 with fewer than 30 years of service would have his or her
annuity reduced by 30% below the amount that would have been paid if the individual were age
62 or older at retirement.
Of the 37,635 federal employees covered by CSRS who retired under normal, voluntary rules in
FY2009, 39% were between the ages of 55 and 59. They had an average of 34.5 years of federal
service.4 Twenty-one percent of federal workers who took normal retirement under CSRS in 2009
were age 62 or older. The average age of all federal workers covered by CSRS who retired in
2009 under normal, voluntary retirements was 60.2 years. Their average length of service was
34.8 years. Because relatively few employees hired before 1984 elected to switch to FERS,
individuals who have been retiring under FERS have tended to be those who joined or rejoined
the federal work force relatively late in their careers. In FY2009, 20,219 federal employees
retired with immediate annuities under FERS. Their average age was 63.2 years, and their
average length of service in the federal government was 20.2 years.5 The average length of
service for workers retiring under FERS will rise over time as the proportion of federal
employees who spent their entire careers under FERS continues to increase.
4 “Normal, voluntary” retirements exclude those occurring due to disability, involuntary and voluntary retirements
resulting from reductions in force, and mandatory early retirement for federal law-enforcement officers, firefighters,
and air traffic controllers.
5 All data cited in this paragraph come from U.S. Office of Personnel Management, “Statistical Abstracts Fiscal Year
2009, Federal Employee Benefits Programs.”
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Calculating the FERS Basic Retirement Annuity
The FERS basic retirement annuity is a defined benefit (DB) pension. The amount of the pension
benefit is determined by multiplying three factors—the employee’s number of years of service,
the annual benefit accrual rate, and the salary base—as is shown in the following formula:
pension amount = years of service x accrual rate x salary base
Salary Base
In both CSRS and FERS, the salary base is the average of the employee’s three highest
consecutive years of basic pay, sometimes called “high-three pay.”6
Accrual Rate
The annual benefit accrual rate is the percentage of the salary base that a worker earns in pension
benefits for each year of service. Under FERS, retirement benefits accrue at the rate of 1.0% per
year. A worker with 30 years of service will have accrued a pension benefit equal to 30% of the
FERS salary base.7 Employees with 20 or more years of federal service who retire at age 62 or
later are credited with a benefit accrual rate of 1.1% for each year of service. For example, a
worker under FERS who retires at 61 with 29 years of service would receive a FERS annuity
equal to 29% of his or her high-three average pay. Delaying retirement by one year would
increase the annuity to 33% of high-three average pay because the benefit accrual rate would be
1.1% for each year of service rather than 1.0% per year of service.
Under CSRS, employees accrue pension benefits at rates that increase with length of service. The
CSRS benefit accrual rate is 1.5% for each of the first five years of service; 1.75% for the sixth
through tenth years of service; and 2.0% for each year of service after the tenth year.8 This results
in a retirement annuity equal to 56.25% of high-three average pay for a worker who retires with
30 years of service.
Social Security, and the “FERS Supplement”
Congress intended the FERS to be a complete retirement package consisting of Social Security,
the FERS annuity, and the Thrift Savings Plan. Because Social Security retirement benefits
cannot begin before age 62, Congress included in the FERS a temporary supplement for federal
workers who retire before age 62. The FERS supplement is equal to the portion of the Social
Security benefit to which the worker will be entitled at age 62 that is attributable to his or years of
6 This calculation is based on nominal (current) dollars rather than indexed (constant) dollars.
7 Under FERS, members of Congress, congressional staff, and certain public safety workers accrue benefits at the rate
of 1.7% per year for the first 20 years of service and 1.0% per year for service over 20 years. These rates yield a
pension equal to 34% of the FERS salary base after 20 years of service and 44% after 30 years of service, provided that
both the age and length of service requirements for retirement with a full FERS annuity have been met.
8 Under CSRS, initial benefits are capped at 80% of high-3 average salary. Members of Congress and congressional
staff accrue benefits at the rate of 2.5% for each year of service. This yields an annuity equal to 75% of the CSRS
salary base after 30 years of service. Certain public safety workers accrue benefits at 2.5% per year for up to 20 years
of service and 2.0% per year for service beyond 20 years.
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federal employment under FERS. The FERS supplement is paid until age 62 to workers who
retire at the minimum retirement age (currently 56) or older with at least 30 years of service, or at
age 60 with at least 20 years of service. The FERS supplement terminates at age 62, regardless of
whether the individual applies for Social Security retired worker benefits at that time.
Cost-of-Living Adjustments
Cost-of-living adjustments (COLAs) protect the purchasing power of retirement benefits from
being eroded by inflation. COLAs increase the nominal amount of retirement income, but they do
not increase its real value. COLAs have been in effect since 1962 for CSRS, and since the
inception of FERS.
Retirement benefits paid under CSRS are fully indexed for inflation, as measured by the
Consumer Price Index for Wage and Salary Workers (CPI-W).9 The FERS basic annuity is fully
price-indexed only if the annual rate of inflation is 2% or less. FERS benefits are partially
indexed if inflation is in excess of 2%. If the CPI-W increases by 2% or less, the FERS monthly
benefit is increased by the annual percentage increase in the CPI-W. If the CPI-W increases by
2% to 3%, the increase in the FERS annuity is limited to 2%. If the CPI-W increases by more
than 3%, the increase in the FERS annuity is equal to the rise in the CPI-W minus one percentage
point. Under FERS, COLAs are provided only to retirees who are aged 62 or older, annuitants
under age 62 who retired because of a disability, and survivor annuitants.
The Thrift Savings Plan
The Thrift Savings Plan is a defined contribution (DC) retirement plan similar to the 401(k) plans
provided by many employers in the private sector.10 Newly hired federal employees who
participated in a 401(k) plan can, if they choose, roll over their 401(k) account balances into the
TSP. Workers who leave the federal government for jobs in other sectors of the economy can
leave their money in the TSP—where it will continue to accrue interest, dividends, and capital
gains according to the performance of the funds in which they have chosen to invest—or they can
roll over their TSP funds on a tax-deferred basis into another tax-qualified retirement savings
account such as an IRA or a 401(k) plan. All TSP participants are immediately and fully vested in
their contributions to the plan, federal matching contributions, and any growth in the value of
their investment from interest, dividends, and capital gains. Participants are fully vested in the 1%
agency automatic contributions to the TSP after three years (two years for congressional
employees and executive-branch political appointees).
9 Under both CSRS and FERS, COLAs are paid out beginning in January each year, based on the percentage increase
in the CPI-W for the third calendar quarter (July-Sept.) of the most recent year compared with the average CPI-W for
the third calendar quarter of the last year a COLA was determined. In 1994, 1995, and 1996, COLAs for civil service
annuitants were delayed from January until April to achieve budgetary savings. There was no automatic COLA for civil
service annuitants in 2010. And there is no automatic COLA in 2011. For more details on COLAs for CSRS and FERS
annuitants, see CRS Report 94-834, Cost-of-Living Adjustments for Federal Civil Service Annuities, by Katelin P.
Isaacs.
10 “401(k)” refers to the section of the Internal Revenue Code that authorizes deferral of income taxes until the time of
withdrawal for contributions to certain kinds of savings plans and for the interest and dividends on those contributions.
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P.L. 106-361 (October 27, 2000) allows “rollover distributions” into the TSP from other tax-
qualified retirement savings plans, such as those authorized for private-sector firms under Section
401(k) of the tax code and for non-profit organizations under I.R.C. Section 403(b). This law also
allows employees to begin making tax-deferred contributions to the TSP immediately upon
becoming employed by the federal government. Newly hired employees are not eligible for
employer matching contributions for 6 to 12 months, depending on the date on which they were
hired. P.L. 106-398 (October 30, 2000) allows uniformed military personnel on active duty or in
the ready reserve to participate in the TSP under the same terms and conditions as civilian federal
employees, but without matching contributions11 P.L. 111-31 (June 22, 2009) provides for newly
hired federal employees to be enrolled automatically in the TSP at a default contribution rate of
3% of pay. Default contributions are invested in the “G” fund (government security fund) of the
TSP. Participants can elect a different contribution rate and select a different investment fund or
funds, or they can elect not to contribute to the TSP.
Employee and Agency Contributions
Federal agencies contribute an amount equal to 1% of basic pay to the TSP for each employee
under FERS, whether or not the employee chooses to contribute anything to the plan. In 2011,
employees can contribute up to $16,500 to the TSP.12 Employees aged 50 and older can contribute
an additional $5,500. Contributions to the TSP are made on a pre-tax basis, and neither the
employee’s contribution nor any investment earnings are taxed until the money is withdrawn
from the account. In addition, contributions of up to 5% of pay made by employees under FERS
are matched by the federal government according to the schedule shown in Table 2. Federal
workers covered by CSRS also may contribute to the TSP, but they receive no matching
contributions from their employing agencies.
P.L. 111-31 (June 22, 2009) directed the Federal Retirement Thrift Investment Board to add a
qualified Roth contribution option to the TSP. Under a Roth contribution option, employee salary
deferrals into a retirement plan are made with after-tax income. Qualified distributions from the
plan—generally, distributions taken five or more years after the participant’s first Roth
contribution and after he or she has reached age 59½—are tax-free.
Table 2. Government Matching Rate on TSP Contributions by FERS Participants
(as a percentage of salary)
Employeea Government
Total
0.0 1.0
1.0
1.0 2.0
3.0
2.0 3.0
5.0
3.0 4.0
7.0
4.0 4.5
8.5
5.0 or more
5.0
10.0
11 Members of the uniformed services are eligible for matching contributions only in some cases. Matching
contributions are permitted only for personnel in critical occupational specialities, and they must agree to re-enlist for
six years to be eligible for the agency contribution. The FY2006 National Defense Authorization Act expanded the
authority for agency contributions to include the duration of the initial enlistment of enlisted personnel.
12 Maximum annual salary deferrals are set in law at I.R.C. §402(g).
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Source: 5 U.S.C. § 8432
a. Subject to a maximum of $16,500 in 2011 under I.R.C. §402(g).
Maximum Allowable Thrift Savings Plan Contribution
Prior to July 1, 2001, employees under FERS could contribute no more than the lesser of 10% of
pay or the maximum tax-deferred contribution permissible under section 402(g) of the Internal
Revenue Code. P.L. 106-554 (December 21, 2000) increased the maximum allowable employee
contribution to the TSP by one percentage point each year for five years. Beginning in July 2001,
employees in the FERS were allowed to contribute up to 11% of pay to the TSP, and employees
in the CSRS were allowed to contribute up to 6% of pay to the TSP. The maximum permissible
contribution rose by one percentage point each year until reaching 15% for FERS and 10% for
CSRS in 2005. The percentage-of-pay limits on contributions to the TSP were eliminated
beginning in 2006. Employee contributions to the TSP are now subject only to the limits
applicable under IRC §402(g). This limit is $16,500 in 2011. Employees who will be 50 or older
at any time in 2010 can make additional “catch-up” contributions of up to $5,500.
Penalty on Early Withdrawals
With certain exceptions, I.R.C. §72(t) imposes a 10% additional tax on distributions from all
qualified plans, including the TSP, unless the individual is over age 59½, dies, or becomes
disabled.13 This additional tax does not apply to early distributions if they are paid:
1. after the plan participant has reached age 59½;
2. to a beneficiary after the death of the participant;
3. because the participant has become disabled;
4. to an alternate payee under a qualified domestic relations order (QDRO);
5. to an employee who has separated from service under an early retirement
arrangement after reaching age 55;
6. as dividends paid from an Employee Stock Ownership Plan (ESOP);
7. through an IRS levy to collect back taxes owed by the plan participant;
8. to pay medical expenses of the plan participant, a spouse, or dependent, but only
to the extent that they exceed 7.5% of adjusted gross income;
9. as part of a series of substantially equal periodic payments (SEPPs) over the life
of the participant or the joint lives of the participant and beneficiary; or,
10. to a reservist who is ordered to active duty for more than 179 days.
A participant in the TSP must begin taking distributions from the TSP no later than April of the
year after the year in which the participant attains age 70½, unless the participant is still
employed by the government. These distributions must be included in the participant’s taxable
13 For more information, see CRS Report RL31770, Individual Retirement Accounts and 401(k) Plans: Early
Withdrawals and Required Distributions, by John J. Topoleski.
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income for the year. The requirement to begin taking distributions after age 70½ does not apply to
qualified Roth contributions, because Roth contributions are made with after-tax income.
Participant Loans
Participants may borrow from their TSP accounts. General purpose loans must be repaid within
five years. Residential loans taken for the purpose of purchasing a primary residence must be
repaid within 15 years. Participant loans may be taken only from participant contributions and
attributable earnings and cannot exceed the lesser of one-half of the participant’s vested account
balance or $50,000.14
The interest rate for TSP loans is the “G Fund” interest rate at the time the loan agreement is
issued by the plan’s record keeper. The rate is fixed at this level for the life of each loan. Interest
earned on loans is allocated to the participant account upon repayment. Participants whose loans
are in default have until the end of the following calendar quarter to pay the overdue amount. If
not repaid by that time, the loan plus accrued interest is treated as a taxable distribution to the
plan participant, which may be subject to the 10% penalty on retirement plan distributions made
before age 59½. If the participant leaves federal service, the balance of the loan must be repaid in
full or the loan will be treated as a taxable distribution.
Age-based Withdrawals and Hardship Withdrawals
In general, participants cannot withdraw money from the TSP until they separate from federal
employment. Distributions while the participant is still employed by the federal government are
permitted only if the individual is experiencing a financial hardship or has reached age 59½.
Participants who are over age 59½ and are still employed by the federal government can take a
single age-based withdrawal from the TSP. The participant must include the withdrawal in his or
her taxable income for the year unless the withdrawal is deposited into an IRA or other tax-
qualified retirement plan within 60 days.15
A participant can take an in-service withdrawal from the TSP if he or she is experiencing a
financial hardship. Hardship withdrawals must be included in the participant’s taxable income
and they may be subject to an additional 10% tax if the participant is under 59½ years old. Only
the participant’s contributions and earnings on those contributions can be withdrawn and the
amount of the withdrawal is limited to the amount of his or her financial need. A participant is
prohibited from contributing to the TSP for six months after the date on which he or she receives
a hardship withdrawal.
To qualify for a hardship withdrawal, the participant’s financial need must arise from one or more
of the following:
• negative monthly cash flow;
• medical expenses that are not covered by insurance;
• personal casualty losses that are not covered by insurance; or
14 More information on TSP loans is available at https://www.tsp.gov/PDF/formspubs/tspbk04.pdf.
15 More information on in-service withdrawals from the TSP is available at http://www.tsp.gov/forms/tspbk12.pdf.
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• legal expenses arising from separation or divorce.
TSP Investment Options
The contribution that the TSP will make to a federal employee’s retirement income depends on
the value of the account at retirement. The value of the account in turn depends on the worker’s
salary during his or her federal service, the percentage of salary contributed to the TSP, the
number of years over which investment earnings accrued to these contributions, and the
performance of the funds into which the employee directed the contributions. Currently,
participants in the TSP can deposit their contributions into one or more of five funds:
• The “C” fund invests in stocks of corporations that are represented in the
Standard and Poor’s 500 index.
• The “F” fund invests in securities represented in the Shearson Lehman Brothers
Aggregate (SLBA) bond index.
• The “G” fund consists of U.S. government securities and pays interest equal to
the average rate of return on long-term U.S. government bonds.
• The “S” fund invests in the common stocks that are represented in the Wilshire
4500 index. These companies are smaller than those in the S&P 500 index.
• The “I” fund invests in the stocks of foreign corporations represented in the
Morgan Stanley Capital Investment EAFE (Europe, Australia-Asia, Far East)
index.
In 2005, the TSP introduced “Lifecycle Funds.” The Lifecycle Funds are invested in various
combinations of the five existing TSP funds. The allocation of contributions among the five core
TSP funds is based on the year that the participant expects to begin withdrawing money from the
TSP. As the participant approaches retirement, the proportion of contributions invested in the C, I,
and S funds—which invest in stocks—is reduced. The proportion invested in the G and F funds—
which invest in bonds—is increased. This helps to protect participants who are nearing retirement
from investment losses that would occur from a sharp decline in equity prices. The TSP L funds
consist of the L2010, L2020, L2030, and L2040 funds and the L Income Fund.
Historical rates of return for the five core TSP funds are shown in Table 3.
Table 3. Annual Rates of Return for Thrift Savings Plan Funds
Year
G Fund
C Fund
F Fund
S Funda I
Funda
1988 8.8%
11.8%
3.6%
20.5%
26.1%
1989
8.8% 31.0% 13.9% 23.9% 10.0%
1990 8.9%
-3.2%
8.0%
-13.6%
-23.6%
1991
8.1% 30.8% 15.7% 43.5% 12.2%
1992
7.2% 7.7% 7.2% 11.9%
-12.2%
1993 6.1%
10.1%
9.5%
14.6%
32.7%
1994 7.2%
1.3%
-3.0%
-2.7%
7.8%
1995
7.0% 37.4% 18.3% 33.5% 11.3%
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Year
G Fund
C Fund
F Fund
S Funda I
Funda
1996 6.8%
22.8%
3.7%
17.2%
6.1%
1997 6.8%
33.2%
9.6%
25.7%
1.5%
1998 5.7%
28.4%
8.7%
8.6%
20.1%
1999 6.0%
21.0%
-0.8%
35.5%
26.7%
2000 6.4%
-9.1%
11.7%
-15.8%
-14.2%
2001 5.4%
-11.9%
8.6%
-2.2%
-15.4%
2002 5.0%
-22.1%
10.3%
-18.1%
-16.0%
2003 4.1%
28.5%
4.1%
42.9%
37.9%
2004 4.3%
10.8%
4.3%
18.0%
20.0%
2005
4.5% 5.0% 2.4% 10.5% 13.6%
2006 4.9%
15.8%
4.4%
15.3%
26.3%
2007
4.9% 5.5% 7.1% 5.5% 11.4%
2008 3.8%
-37.0%
5.5%
-38.3%
-42.4%
2009 3.0%
26.7%
6.0%
34.9%
30.0%
1988-2009 6.1% 9.3% 7.1% 10.2% 5.6%
Source: Federal Retirement Thrift Investment Board. Returns are net of TSP expenses.
a. Actual rates of return for S and I Funds since May 2000. Rates of return for Wilshire 4500 Index and the
EAFE Index, respectively, before May 2000.
TSP Withdrawal Options
At retirement, an employee can withdraw funds from the TSP immediately or at a later date.
There are four ways that an employee can withdraw funds from the TSP:
• as a life annuity,16
• in a single lump-sum payment,
• in a series of monthly payments, either for a fixed number of months or in a fixed
dollar amount, until the account is depleted, or
• partly as a lump sum, and partly as an annuity or series of payments.17
16 A life annuity is a contract between the individual and an insurance company, in which the individual exchanges a
lump sum for a guaranteed stream of monthly payment for the rest of his or her life, and often for the lifetime of a
surviving spouse. The insurance company invests the lump sum and uses the earnings of the investment as well as the
principal to make the payments to the annuitant, which are based both on the estimated rate of return from the
investment and actuarial estimates of the annuitant’s remaining life expectancy. TSP annuities are issued by MetLife.
17 The annuity or series of payments must begin at the time the lump sum is paid.
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TSP Participation Rates
As of October 2010, there were 4.4 million active and retired participants in the TSP, including
both current and former civilian employees and members of the armed services. Among civilian
federal employees who were enrolled in FERS, 83% of those who were eligible to participate in
the TSP were making payroll contributions in October 2010. Among employees enrolled in the
CSRS, 66% were contributing to the TSP. The average TSP account balance among all
participants in October 2010 was $61,439.
As of October 2010, assets invested in the TSP totaled $270.1 billion. The “G” fund held assets of
$116.4 billion; the “C” fund held assets of $63.8 billion; and the “F” fund held assets of $18.3
billion. The “S” fund held assets of $20.2 billion and the “I” fund held assets of $18.8 billion. The
new “L” funds—which invest in the other five TSP funds—held assets of $32.6 billion.
As a share of TSP assets, the “G” fund held 43% of the total, the “C” fund held 24%, the “F” fund
held 7%, the “S” fund held 7%, the “I” fund held 7%, and the “L” funds held 12% of the total
assets in the TSP. The share of total TSP assets held in each fund reflects the historical rates of
return among the funds, the distribution of employer and employee contributions among the
funds, and transfers of account balances among the funds by participating employees.
Illustrations of the TSP’s Role in Providing
Retirement Income
The following tables illustrate the role of the TSP in assuring an adequate income during
retirement for federal employees enrolled in the FERS. Each table shows the annual salary in the
year before retirement for four employees: one at the GS-4 level, one at GS-8, one at GS-12, and
one at GS-15. The salaries shown are the estimated pay at step 8 of the pay grades in the year
2038 (Table 4 and Table 5) or 2028 (Table 6 and Table 7), assuming that future federal salary
increases average 4.0% per year.18 The salary amounts are expressed in their 2011 dollar
equivalents, based on the Social Security Actuary’s estimated future inflation rate of 2.8% per
year. The tables show the estimated replacement rates during the first year of retirement for each
of three sources of retirement income: the FERS basic retirement annuity, Social Security, and the
annual income provided by converting an employee’s TSP account into a level, single-life
annuity.19
18 This salary growth assumption comes from the U.S. Social Security Administration’s “The 2010 Annual Report of
the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Trust Funds (available
online: http://www.ssa.gov/oact/TR/2010/index.html). This assumption—and the ensuing illustrations of FERS
replacement rates—does not take into consideration the recent “pay freeze” for federal workers. This pay freeze, as
authorized by the Continuing Appropriations and Surface Transportation Extensions Act, 2011 (P.L. 111-322; signed
December 22, 2010), suspends statutory pay adjustments (under section 5343(a) of title 5, U.S. Code) for the period
between January 1, 2011, and December 31, 2012. For more information on pay for federal workers, including the
process by which pay adjustments are made, see CRS Report RL34463, Federal White-Collar Pay: FY2009 and
FY2010 Salary Adjustments, by Barbara L. Schwemle.
19 A “single-life annuity” pays benefits until the annuitant dies. A “joint and survivor annuity” pays a smaller monthly
benefit, but guarantees continued payment until the death of the annuitant or the annuitant’s spouse, whichever comes
later. A “level annuity” pays a fixed monthly benefit year after year. A “graded annuity” pays a smaller initial monthly
benefit, but the benefit is increased by a fixed percentage (often 3%) as a means of preserving the real value of the
(continued...)
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Within each of the four tables, two factors are varied: pay grade and the employee contribution to
the TSP. Final salaries and retirement income replacement rates are shown for each of four
illustrative pay grades. The replacement rate is shown for employees who make no contribution
to the TSP, and thus receive only the agency automatic 1% contribution; for workers who
contribute 5% of pay, and therefore receive a 5% contribution from their employing agencies; and
for workers who contribute 10% of pay, which results in the same 5% agency contribution as
would a 5% employee contribution.
Across the four tables, two factors are varied: the assumed rate of return on contributions to the
TSP and the employees’ number of years of service at retirement. The results shown in Table 4
and Table 6 are based on a nominal rate of return on investment of 6.0% per year. In Table 5 and
Table 7, the results are based on a nominal rate of return of 8.0% per year. Because the rate of
inflation is assumed in these estimates to average 2.8% per year, the real rate of return on
investment is 3.1% in Table 4 and Table 6, whereas in Table 5 and Table 7 the real rate of return
on investment is 5.1% per year.20 In Table 4 and Table 5, the replacement rates have been
estimated for a federal employee who retires on December 31, 2040 at age 62 after 30 years of
service under FERS. In Table 6 and Table 7, the replacement rates have been estimated for an
employee who retires on December 31, 2030 at age 62 after 20 years of service under FERS.
The results presented in each of the following tables assume that the employee contributed the
same percentage of pay to the TSP each year over the length of his or her entire career. The tables
illustrate the effects of career-long employee contribution rates of 0%, 5%, and 10%. Table 4 and
Table 5 show the replacement rates after a 30-year career, assuming nominal rates of return on
investment of 6.0% per year and 8.0% per year, respectively. Obviously, actual rates of return on
an employee’s TSP account will vary from year to year, and over 30 years an employee could
achieve average rates of return that are higher or lower than the results shown here. Moreover,
many employees begin their careers contributing little or nothing to the TSP and gradually
increase their contributions as their incomes increase, and as they become more aware of the need
to save for retirement. Consequently, these examples should be regarded as illustrations only.
Estimated Replacement Rates for a 30-Year Employee
For a federal employee who begins his or her career in 2011 and retires after 30 years of service,
the FERS basic annuity will provide first-year retirement income equal to about 32% of the
worker’s final annual salary. (See Table 4 and Table 5.) The dollar amount of the annuity will be
higher for higher-paid employees, but the replacement rate will be approximately the same,
regardless of the employee’s final salary level. The replacement rate for Social Security benefits,
however, declines as a worker’s income increases. The benefit formula for Social Security is
“tilted” in favor of low-wage workers; therefore, the percentage of earnings replaced by Social
Security is greater for low-wage workers than for high-wage workers.21
(...continued)
benefit against the effects of inflation.
20 The real rates of return are derived as follows: 1.06/1.028 = 1.031 and 1.08/1.028 = 1.051.
21 Social Security is intended to replace a relatively higher percentage of career-average pay for low-wage workers than
for high-wage workers in part because Congress recognized when designing the program that low-wage workers are
less able to save for retirement.
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The lower rate of income replacement provided to high-wage workers by Social Security is one
of the main reasons why these workers need a higher rate of personal saving in order to reach the
same total income replacement rate as lower paid workers are able to attain through the
combination of the FERS retirement annuity and Social Security. For a federal worker retiring at
the GS-4 salary level at age 62 after 30 years of federal employment, monthly Social Security
benefits will replace an estimated 25% of final salary. (See Table 4 and Table 5.) For a worker
retiring at the GS-8 salary, the replacement rate for Social Security drops to 21% of final pay. For
a worker retiring at the GS-12 salary level, Social Security will replace only 19% of final pay.
Social Security will replace just 14% of final pay for a worker who retires at the GS-15 salary
level.
The proportion of pre-retirement income that will be replaced by converting the employee’s TSP
account into a retirement annuity will depend on the individual’s age, the balance in the account,
and the interest rate at which the account balance is converted to an annuity. The account balance
at retirement depends on the percentage of pay that the employee contributed throughout his or
her career, the rate of return earned by the funds in which these contributions were invested, and
the length of time over which contributions to the TSP were in the fund earning interest,
dividends, and capital gains. For any given account balance, an older individual will receive a
larger annuity than a younger person. Likewise, a higher annuity interest rate will provide a larger
annuity. The annuity interest rate is determined by the prevailing long-term interest rates in the
nation’s credit markets.
Employees enrolled in the FERS have an amount equal to 1% of pay contributed to the Thrift
Savings Plan by their employing agencies, even if the employee makes no voluntary contributions
to the TSP. This amount is not deducted from employee pay. It is paid by the employing agency
from sums appropriated to it by Congress for salaries and related expenses. Assuming a nominal
annual investment return of 6.0%, an employee who retires after 30 years of federal employment
will be able to replace only about 3% of final salary from his or her TSP account if he or she
never makes a voluntary contribution to the plan. (See Table 4.) Assuming an 8.0% rate of return,
the TSP could still replace about 3% of pay for a worker who makes no voluntary contributions.
(See Table 5.)
With only the agency automatic 1% contribution, the combined income from FERS, Social
Security, and the TSP would leave workers at all four illustrated pay levels at or below a 60%
income replacement rate, which is below the 70% to 80% replacement rate that many pension
professionals regard as the minimum necessary for maintaining one’s accustomed standard of
living in retirement. By contributing 5% of pay, however, the replacement rate can be boosted
substantially. Even assuming a relatively low nominal rate of return on investment of 6.0%,
annual employee contributions of 5% of pay to the TSP would boost the replacement rate to 71%
at the GS-15 level and to 82% at the GS-4 level after a 30-year career.
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Table 4. Illustration of Replacement Rates under FERS for an Employee Retiring at
Age 62 After 30 Years of Service
(Assuming an average annual nominal rate of return on TSP of 6.0% )
GS-4
GS-8
GS-12
GS-15
Final salary in 2011 dollars:
$48,331
$74,180
$118,819
$196,401
Source of retirement income:
Percent of pre-tax final salary replaced by each source of income:
FERS basic retirement annuity
32% 32% 32% 32%
Social Security
25% 21% 19% 14%
TSP monthly annuity with only 1%
3% 3% 3% 3%
agency automatic contribution
Total replacement rate, first year
60% 56% 54% 49%
TSP monthly annuity with 5% from
25% 25% 25% 25%
employee and 5% agency match
Total replacement rate, first year
82% 78% 76% 71%
TSP monthly annuity with 10% from
37% 37% 37% 37%
employee and 5% from agency
Total replacement rate, first year
94% 90% 88% 83%
Source: Estimates prepared by the Congressional Research Service.
Notes: Includes only Social Security benefits earned while a federal employee. Estimates reflect current law,
including scheduled increases in retirement age. Estimates of income from the TSP are based on a level, single-life
annuity at the January 2011 annuity interest rate of 3.125%.
The impact on replacement rates of the first 5% of employee contributions is especially large
because each additional percent of pay contributed by the employee brings matching
contributions from the employer. The first 3% of pay contributed by the employee is matched
dollar-for-dollar by the employing agency, and the next 2% of pay is matched by the employer at
the rate of 50 cents on the dollar.
Table 5. Illustration of Replacement Rates under FERS for an Employee Retiring at
Age 62 After 30 Years of Service
(Assuming an average annual nominal rate of return on TSP of 8.0% )
GS-4
GS-8
GS-12
GS-15
Final salary in 2011 dollars:
$48,331
$74,180
$118,819
$196,401
Source of retirement income:
Percent of pre-tax final salary replaced by each source of income:
FERS basic retirement annuity
32% 32% 32% 32%
Social Security
25% 21% 19% 14%
TSP monthly annuity with only 1%
3% 3% 3% 3%
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GS-4
GS-8
GS-12
GS-15
Final salary in 2011 dollars:
$48,331
$74,180
$118,819
$196,401
Source of retirement income:
Percent of pre-tax final salary replaced by each source of income:
agency automatic contribution
Total replacement rate, first year
60% 56% 54% 49%
TSP monthly annuity with 5% from
34% 34% 34% 34%
employee and 5% agency match
Total replacement rate, first year
91% 87% 85% 80%
TSP monthly annuity with 10% from
50% 50% 50% 50%
employee and 5% from agency
Total replacement rate, first year
107% 103% 101% 96%
Source: Estimates prepared by the Congressional Research Service.
Notes: Includes only Social Security benefits earned while a federal employee. Estimates reflect current law,
including scheduled increases in retirement age. Estimates of income from the TSP are based on a level, single-life
annuity at the January 2011 annuity interest rate of 3.125%.
Higher investment returns would result in a higher replacement rate. For an employee who
contributes 5% of pay over a 30-year career, an 8.0% annual rate of return on investment would
result in a TSP account balance that, when converted to a retirement annuity would by itself
replace 34% of final salary. (See Table 5.)
Employee contributions above 5% of pay are not matched by the employing agency, but they still
have a substantial impact on replacement rates. Assuming a 6.0% annual rate of return, a 10%
employee contribution to the TSP over a 30-year career would result in a replacement rate from
the TSP of approximately 37% of final pay. (See Table 4.) When combined with the FERS basic
annuity and Social Security benefits, the TSP can increase the replacement rate for those who
contributed 10% of pay to the TSP over a 30-year career to more than 90% of final pay. Assuming
a rate of return on investment of 8.0%, employees who contribute 10% of pay over a 30-year
career can replace about 50% of their final pay from the TSP. When combined with the FERS
basic annuity and Social Security benefits, the retirement income resulting from a 10% annual
employee contribution and a 8.0% annual rate of return could result in replacement rates of more
than 100% in the initial year of retirement. (See Table 5.)
Estimated Replacement Rates for a 20-Year Employee
Table 6 and Table 7 show the estimated replacement rates achieved by the combination of the
FERS basic annuity, Social Security, and the TSP for an employee who retires at age 62 after 20
years of service under FERS. (Note that the Social Security benefits shown in all examples are
only those that the worker earned during the period that he or she was a federal employee). For a
worker retiring at 62 with 20 years of service, the basic FERS retirement annuity would replace
about 21% of final earnings, regardless of the GS-level from which he or she retires. Because
Social Security’s benefit structure favors low-wage employees, Social Security benefits replace a
higher percentage of final earnings for a worker retiring at the low end of the general schedule
than for one who retires from a job at the high end of the pay scale. Social Security benefits
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earned during a 20-year period of federal employment would replace approximately 21% of final
earnings for a worker who retires from a job at the GS-4 level, compared to a replacement rate of
18% at the GS-8 level, 15% at the GS-12 level, and 12% at the GS-15 level. (See Table 6 and
Table 7.)
The estimates presented in Table 6 and Table 7 make clear that the FERS retirement annuity and
Social Security benefits accumulated over a 20-year period would not provide a level of
retirement income that would meet the minimum 70% replacement rate recommended by most
financial advisors. In these examples, the combined replacement rates achieved by the FERS
annuity and the Social Security benefits attributable to the worker’s period of federal service
range from 33% for a highly paid employee to 42% for a lesser-paid employee. For employees
who make no voluntary contributions to the TSP, the TSP would add a negligible amount to these
replacement rates. For an employee with 20 years of service who makes no contributions to the
TSP, the agency automatic 1% contribution would replace about 1% of final pay based on a 6.0%
annual rate of return. (See Table 6.) Assuming a 8.0% annual investment return, the agency
automatic contribution would replace only 2% of pay for an employee retiring after 20 years of
service. (See Table 7.)
The estimates displayed in Table 6 and Table 7 also show that a worker who participates in the
TSP only during the 20 years immediately preceding retirement will achieve a much lower
income replacement rate than an employee who participates for 30 years. Table 6 shows that an
employee contributing 5% of pay and earning a 6% annual rate of return would be able to replace
about 14% of final pay from his or her TSP account. This is 11 percentage points lower than the
25% replacement rate achieved by an employee who contributes 5% of pay over 30 years and
earns a 6% annual return. Contributing 10% of pay over 20 years at an annual investment return
of 6.0% would raise the employee’s replacement rate to 21%; however, this is 16 percentage
points below the 37% replacement rate achieved by an employee who contributes 10% of pay
over a 30-year period, assuming a 6.0% rate of return.
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Table 6. Illustration of Replacement Rates for FERS-Covered Employee Retiring at
Age 62 After 20 Years of Service
(Assuming an average annual nominal rate of return on investment in TSP = 6.0%)
GS-4
GS-8
GS-12
GS-15
Final salary in 2011 dollars:
$48,331
$74,180
$118,819
$196,401
Source of retirement income:
Percent of pre-tax final salary replaced by each source of income:
FERS basic retirement annuity
21% 21% 21% 21%
Social Security
21% 18% 15% 12%
TSP monthly annuity with only 1%
1% 1% 1% 1%
agency automatic contribution
Total replacement rate, first year
43% 40% 37% 34%
TSP monthly annuity with 5% from
14% 14% 14% 14%
employee and 5% from agency
Total replacement rate, first year
56% 53% 50% 47%
TSP monthly annuity with 10% from
21% 21% 21% 21%
employee and 5% from agency
Total replacement rate, first year
63% 60% 57% 54%
Source: Estimates prepared by the Congressional Research Service.
Notes: Includes only Social Security benefits earned while a federal employee. Estimates reflect current law,
including scheduled increases in retirement age. Estimates of income from the TSP are based on a level, single-life
annuity at the January 2011 annuity interest rate of 3.125%.
At an 8.0% annual rate of return, an employee who participates in the TSP only for a 20-year
period can bring his or her total replacement rate closer to the range that is generally considered
necessary for maintaining one’s standard of living in retirement. At this rate of return on
investment, an employee contributing 5% of pay each year can achieve a replacement rate of 17%
from the TSP. (See Table 7.) Combined with the FERS basic retirement annuity and Social
Security benefits, this would yield a total replacement rate ranging from 50% for a worker retiring
from a GS-15 job to 59% for the lower-paid worker retiring from a GS-4 job. By contributing
10% of pay each year, the 20-year employee can replace an estimated 26% of final pay from the
TSP alone. This would yield a total replacement rate of 59% for the GS-15 employee and 68% for
the GS-4 employee.
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Table 7. Illustration of Replacement Rates for FERS-Covered Employee Retiring at
Age 62 After 20 Years of Service
(Assuming an average annual nominal rate of return on investment in TSP = 8.0%)
GS-4
GS-8
GS-12
GS-15
Final salary in 2011 dollars:
$48,331
$74,180
$118,819
$196,401
Source of retirement income:
Percent of pre-tax final salary replaced by each source of income:
FERS basic retirement annuity
21% 21% 21% 21%
Social Security
21% 18% 15% 12%
TSP monthly annuity with only 1%
2% 2% 2% 2%
agency automatic contribution
Total replacement rate, first year
44% 41% 38% 35%
TSP monthly annuity with 5% from
17% 17% 17% 17%
employee and 5% agency match
Total replacement rate, first year
59% 56% 53% 50%
TSP monthly annuity with 10% from
26% 26% 26% 26%
employee and 5% from agency
Total replacement rate, first year
68% 65% 62% 59%
Source: Estimates prepared by the Congressional Research Service.
Notes: Includes only Social Security benefits earned while a federal employee. Estimates reflect current law,
including scheduled increases in retirement age. Estimates of income from the TSP are based on a level, single-life
annuity at the January 2011 annuity interest rate of 3.125%.
Workers Who Leave Federal Employment Before Reaching
Retirement Age
For employees who switch jobs one or more times over the course of their careers, a defined
contribution retirement plan such as the TSP has an advantage over the traditional defined benefit
pension in that the value of the accrued benefit can continue to increase until the employee
reaches retirement age. All that is required for this to occur is for the employee to refrain from
spending any lump-sum distributions that he or she may receive before retiring and for the
accrued benefit to remain invested in a tax-deferred retirement account that achieves a total rate
of return before retirement that is greater than the rate of inflation.
Employees who have become vested in a traditional defined benefit pension—including the
FERS basic annuity—are legally entitled to the benefit they have earned upon reaching the plan’s
normal retirement age even if at that time they no longer work for the employer where they
earned the pension. In most defined benefit pension plans, including FERS, the annuity is based
on the employee’s actual earnings during their period of employment with the firm. These salary
amounts are not adjusted for inflation between the time the employee leaves the firm and the date
of retirement. For example, consider an employee who leaves the federal government for another
employer at age 40 after 10 years of service. If this individual’s highest three consecutive years of
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earnings averaged $50,000, he or she would be entitled to an annuity of $5,000 per year
beginning at age 62.22 The worker in this example would be eligible to begin receiving the $5,000
annuity at age 62, 22 years after leaving the federal government. If inflation were to average 3.0%
per year over those 22 years, the retiree’s first-year annuity of $5,000 would be worth only about
$2,600 in 2011 dollars.23
In contrast to the example just cited, money held in a defined contribution plan like the TSP can
continue to grow throughout an individual’s working life, regardless of how often he or she
changes jobs. If the employee in the example above had contributed 10% of pay to the TSP each
year and the contributions had earned an average rate of return of 6%, the account would have
reached a value of approximately $81,000 after 10 years.24 If the departing employee were to
leave this money invested in the TSP or transfer it to another tax-deferred retirement account, this
sum would continue to grow until the employee withdrew the funds.25 Assuming that the funds
earned a relatively modest annual return of 6.0%, the total will have risen to $348,000 by the time
he or she reaches age 65. At current interest rates, this would be sufficient to purchase an annuity
that would pay the retiree $25,032 per year ($2,086 per month) for the rest of his or her life.26
The Thrift Savings Plan Enhancement Act of 2009
H.R. 1256 (111th Congress), the Family Smoking Prevention and Tobacco Control Act, was
signed into law as P.L. 111-31 by President Barack Obama on June 22, 2009. H.R. 1256 contains
the Thrift Savings Plan Enhancement Act as Title I of Division B of the bill. As enacted, P.L. 111-
31:
• provides for newly hired federal employees to be enrolled automatically in the
Thrift Savings Plan (TSP) at a default contribution rate of 3% of pay;
• requires the Federal Retirement Thrift Investment Board to establish within the
TSP a qualified Roth contribution program that provides for after-tax
contributions and tax-free distributions;
• gives the Federal Retirement Thrift Investment Board authority to allow TSP
participants to invest in mutual funds in addition to the five investment funds
now included in the TSP;
22 FERS employees accrue benefits each year equal to 1.0% of the average of their high-3 pay. An employee with five
or more years of service can receive a full annuity at age 62.
23 Once payment of a FERS annuity begins, it is protected from inflation by annual cost-of-living adjustments—but
only partially and only for retirees age 62 and older. See CRS Report 94-834, Cost-of-Living Adjustments for Federal
Civil Service Annuities, by Katelin P. Isaacs.
24 Based on contributing 10% of pay (plus 5% employer match) from a starting salary of $32,000 and ending salary of
$52,000 to an account earning 6.0% compounded annually.
25 Departing employees who have not reached age 55 can leave their TSP accounts intact, in which case they will
continue to accrue interest, dividends, and capital gains until the individual withdraws the money. They also can “roll
over” their TSP accounts into another tax-qualified retirement account such as an Individual Retirement Account (IRA)
or another employer’s 401(k). Alternatively, a departing employee can withdraw his or her funds from the TSP without
rolling them over into another account, in which case both regular income taxes and a 10% tax penalty will apply.
26 Based on a level, single-life annuity at an interest rate of 3.125%.
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• requires the Thrift Board to submit to Congress an annual report that includes
demographic information about TSP participants and fund managers;
• requires participants to sign an acknowledgement of risk if they invest
contributions in any investment option other than government securities;
• grants the executive director of the TSP authority to issue subpoenas under
certain circumstances;
• allows funds held in an individual’s TSP account to be subject to court orders
with respect to payment of restitution to victims of certain crimes;
• requires the Secretary of Defense to report to Congress the estimated cost of an
agency match on contributions to the TSP by members of the uniformed services;
and
• allows the surviving spouse of a deceased TSP participant to maintain the
decedent’s account with the TSP.
Conclusion
The Thrift Savings Plan plays a pivotal role in helping federal workers achieve adequate
retirement income. Employees enrolled in the FERS who do not make voluntary contributions to
the TSP, and thus receive only the 1% agency automatic contribution, will be able to replace only
1% to 3% of final annual salary from the TSP at retirement. Most workers in the lower and
middle ranges of the federal salary scale will be able to achieve the 70% salary replacement
recommended by many pension analysts from the benefits paid by Social Security and the FERS
basic retirement annuity, but this is not so for higher-wage federal workers. Federal employees at
all income levels can significantly boost their retirement income by contributing to the TSP, and
such contributions are essential in order for those in the upper third of the federal pay scale to
achieve a level of income that will allow them to maintain their pre-retirement standard of living.
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Appendix. Administration of the Thrift Savings
Plan
The Thrift Savings Plan is administered by an independent government agency, the Federal
Retirement Thrift Investment Board, which is charged in statute with operating the Thrift Plan
prudently and solely in the interest of the participants and their beneficiaries.27 The assets of the
Thrift Plan are maintained in the Thrift Savings Fund, which invests the assets in accordance with
participant instructions in five investment funds authorized by Congress to be included in the
plan. The Thrift Board has contracted with Barclays Global Investors to manage the index funds
in which the F, C, S, and I Fund assets are invested. The contracts for each fund are open to
competitive bids by qualified investment managers every three to five years.
The costs of administering the TSP are paid from the assets of the thrift fund. Administrative
costs of the TSP in 2009 was 2.8 basis points (one basis point is 1/100th of 1 percent, or 0.01%),
or about 28 cents for each $1,000 invested.28
Participant Accounts
The Thrift Plan maintains individual accounts for each participant. Participant accounts are
credited with the participant’s contributions and agency contributions, and are charged for
withdrawals. The value of the participant’s account reflects the number of shares and the daily
share prices of the funds in which the account is invested. Administrative expenses are a
component of the share price calculation. The benefit to which a participant is entitled is the
participant’s vested account. Thrift Plan participants can receive account-balance information and
conduct transactions by automated telephone service or on the Thrift Plan’s website.29
The Federal Retirement Thrift Investment Board
The Federal Retirement Thrift Investment Board was established by the FERS Act of 1986.30 The
board is responsible for developing the investment policies of the Thrift Plan and overseeing the
management of the plan, which is under the day-to-day direction of an Executive Director
appointed by the board.
Three of the five members of the board—including the chairman—are appointed by the President.
The President chooses a fourth member of the board in consultation with the Speaker of the
House and the House Minority Leader and a fifth member in consultation with the Majority and
Minority Leaders of the Senate. Members of the board serve four-year terms and all nominations
are subject to Senate confirmation. The law requires that all nominees to the board must be
27 See 5 U.S.C. § 8472(h).
28 Thrift Savings Plan Fund Information, February 2010, https://www.tsp.gov/PDF/formspubs/fundsheetpkg.pdf.
29 The URL of the Thrift Savings Plan website is http://www.tsp.gov.
30 See 5 U.S.C. § 8472.
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individuals with “substantial experience and expertise in the management of financial
investments and pension benefit plans.”31
Communication and Education
The Thrift Board communicates with plan participants to help them better understand the
investment choices, benefits, and administration of the TSP. Employing agencies distribute
information, including the Summary of the Thrift Savings Plan for Federal Employees, which
provides a comprehensive description of the Plan, as well as booklets describing the loan
program, withdrawal programs, and annuity options under the plan. Investment information also
is provided through the TSP Fund Sheet and the Managing Your Account leaflets which are
available on the TSP website. The Thrift Board also issues a quarterly newsletter, TSP Highlights.
Participants can obtain their account balances from the website, request contribution allocations
and interfund transfers or, in some cases, loans and withdrawals. The website also provides
various calculators that can be used as retirement planning tools. A TSP video is available that
explains the basics of the TSP. TSP Bulletins are issued regularly to inform agency personnel and
payroll specialists of current operating procedures. The ThriftLine, the Board’s toll-free
automated voice response system, provides both general plan and account-specific information.
The authorizing legislation that established the Thrift Board defines the board’s authority and
responsibilities. It provides for substantial independence of the board from political pressures.
Authority
The Thrift Board has the authority to
• appoint the Executive Director of the Thrift Plan;
• remove the Executive Director for cause (requires four votes);
• establish investment policies for the Thrift Plan;
• instruct the Director to take whatever actions the Board deems appropriate to
carry out the policies it establishes; and
• submit to the Congress legislative proposals relating to its responsibilities under
federal law.
Independence
Members of the board are nominated by the President and confirmed by the Senate, but once
confirmed they cannot be removed from their four-year terms without good cause. The selection
and nomination process are designed to assure that members of the board are individuals who are
supported by the President and Congress. They serve in times of good behavior, rather than at the
pleasure of the President or Congress, assuring that they can carry out the responsibilities of their
positions without removal from office. The Federal Retirement Thrift Investment Board receives
no appropriations from Congress. Administrative expenses are paid through agency-automatic
31 See 5 U.S.C. § 8472(d).
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contributions forfeited by employees who leave federal service before they have vested and
charges against participant accounts.
Responsibility
The law requires that the members of the board shall discharge their responsibilities solely in the
interest of participants and beneficiaries. In practice, this means that the investment policies and
management practices of the fund are evaluated by the board exclusively in reference to the
efficient and prudent management of the fund’s assets. This exclusive responsibility serves to
further insulate the board from pressures to adopt investment policies or management practices
that might not be in the long-term interest of preserving and increasing the security and
investment performance of the fund’s assets.
Oversight
To assure that the members of the Thrift Board remain aware of the interests and concerns of
Thrift Plan participants and beneficiaries, the authorizing legislation established the Employee
Thrift Advisory Council. This 14-member council is appointed by the chairman of the Thrift
Board and must include representatives of federal employee and Postal Service labor
organizations, managerial employees, supervisory employees, female employees, senior
executives, and annuitants. All fiduciaries of the plan, including members of the Thrift Board, are
required by law to be bonded.32 The Secretary of Labor is authorized by law to investigate any
suspected breach of duty by a fiduciary of the plan. The financial statements of the Thrift Board
are audited regularly by an independent accounting firm. Congressional oversight of the Thrift
Plan is performed by the House Committee on Oversight and Government Reform and the Senate
Committee on Homeland Security and Governmental Affairs.
Author Contact Information
Katelin P. Isaacs
Analyst in Income Security
kisaacs@crs.loc.gov, 7-7355
Acknowledgments
This report was originally prepared by former CRS Specialist Patrick Purcell. Please direct any inquiries to
the listed author.
32 A “fiduciary” is a person in a position of trust with regard to the property of another. A “bond” is form of insurance
against the potential malfeasance of a plan fiduciary.
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