“A Great Government Plan?”

By Mark Folgmann

We are constantly bombarded by all the things our government does not do well. What kind of grade would we give them on the management and oversight of Medicare or Social Security? Probably not an “A.” Let me share a little know area where our government does an excellent job. It’s in an area that benefits them directly and the rest of us indirectly. The Government Thrift Savings Plan is bar none the most attractive voluntary retirement plan system in the nation. This plan is so well thought out and implemented that the overall cost is almost zero. They have linked all the Federal agencies and into the same plan to obtain economies of scale and drive down overall cost to the Federal employees to 1.9 basis points. They have limited asset class choice to only five and have dramatically simplified the plan. This means that an employee saving for their own retirement will pay only 19 cents in cost for every one thousand dollars invested in their account. When I review 401(k)s in our region I typically find the overall plan cost are in excess of 300 basis points, that’s right 150 times more expensive than the government’s thrift plan. Let’s assume we have a 35 year old earning $45,000 with $15,000 accumulated in his 401(k) and adds $300/month until he’s 65. Let’s also assume that both portfolios earn an identical 7.5% gross return before cost. The government employee in this case would end up with approximately $515,000 account balance that would generate $1,716 per month in retirement income. The non government employee would have an ending balance of $285,000 which would generate $950 per month in retirement income. Since the government takes its fiduciary responsibility serious and have implemented the best low cost solutions they are demonstrating that it is possible to produce successful outcomes.

Just think about this for one minute, a difference of $766 per month in retirement income for the rest of your life and the only thing we changed was the cost of the plan. We have not even addressed the problem of contribution rates or investment behavior. We have not even talked about implementing a prudent fiduciary process to increase outcomes. We haven’t yet thought about matching cash flows of the plan with future expected liabilities nor have we discussed proper investment diversification. We have only focused on one thing, fees! I stated earlier that the Government Thrift Savings Plan benefits us indirectly and what I was referring to is the fact that most if not all government employees will retire with more money than they would in the private sector and therefore they will have the economic ability to live with dignity independence and therefore support and drive our economy. This probably will not be the case with the private sector unless we really start to pay attention. I talk to employers each and every week and there are too many employers placing their employee’s retirement income in the hands of unqualified people and therefore trusting them to deliver successful outcomes. The typical worker needs between ten and fifteen times their ending salary in their plan to maintain their lifestyle and dignity in retirement. Imagine what Northern Michigan or Michigan for that matter would be like if each and every retiree had an additional $766/month, each and every month for the rest of their life. Next time we will discuss how we can copy the Government Thrift Plan to produce better retirement outcomes for private sector employees.