First, the basics. What is a Mutual Fund?
A mutual fund is a company that pools money from many investors and invests the pooled money in other investments such as stocks, bonds, and short term debt instruments. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
Why do they call it a Mutual Fund Window?
A mutual fund window (MFW) is a type of self-directed brokerage account that gives individuals the ability to buy shared of mutual funds through a broker-dealer that has been selected by the retirement plan.
A little history.
A 2008 TSP Survey indicated that 39% of participants believed the addition of a mutual fund window would improve TSP. In 2009, Congress passed legislation authorizing, but not requiring TSP to offer this. In April of that same year, the board deadlocked on whether to offer a MFW or not (vote of 2 to 2). FRTIB created a cross-functional team of SMEs who then spent several years studying industry practices, costs, etc. The Board voted unanimously July 2015 to include MFW in scope of service sought the next time it recompeted major service provider contracts in August 2019. Ultimately, contract awarded November 2020.
So what do you need to know?
(I) Mutual Funds Are Not for Everyone.
Unlike G, F, C, S, I, and L Funds, mutual funds available through a brokerage account aren’t vetted by a plan fiduciary to determine whether they are wise investments. There is more risk. YOU need to carefully review the prospectus for each mutual fund (MF) you consider and make your own decisions about which ones will meet your investment goals. This concerns several Congressmen although their letter was written after TSP had already suspended transactions in order to update the system.
(II) Only Experienced Investors Can Participate.
Initial fund transfer must be at least $10,000 and may not cause the portion of your TSP balance that is in mutual funds to exceed 25% of your total TSP balance. These two restrictions taken together would require a person to have a minimum TSP balance of $40,000 before being eligible to invest in MFs. Subsequent transfers to the MFW would be limited to amounts that do not cause the MFW portion to exceed 25% of the participant’s total TSP balance.
(III) There are additional fees.
The law requires no additional fees for TSP participants who choose not to invest in mutual funds. This means those who do, will pay
(a) Annual mx fee of $95
(b) Per trade fee $28.75
(c) $55 to offset admin fees. This amount will be reviewed every 3 years. It was derived by multiplying an assumed average MFW account of $120K by an assumed admin expense ratio of 4.59 basis points. FRTIB proposed to redetermine the annual fee every three years using actual average MFW account balances and expense ratio, as of the date of redetermination.
(d) Fees and expenses imposed by specific mutual fund the individual decides to invest in.
(IV) Everything must be done through transfer.
You cannot make contributions directly to the mutual fund. Everything must be transferred from G, F, C, S, I, and/or L. You cannot withdraw directly from the mutual fund; everything must be transferred back to G, F, C, S, I, and/or L first. These transfers count towards the monthly limit of two inter-fund transfers.
(V) Forced Distributions Still Apply.
If TSP is required to pay a distribution (e.g. Required Minimum Distribution / court orders) and the amount invested in G, F, C, S, I, and/or L is insufficient to cover it, the FRTIB will force a transfer from mutual funds. If that MF balance is at least $25,000, the forced transfer will equal the amount needed to cover the insufficiency plus $1,000. If the MF balance is less than $25,00, the entire account balance will be transferred back to TSP’s core funds in accordance with the participant’s existing contribution allocation.
Read more by going directly to TSP’s website.