Young Negotiators

Three House members who oversee the Thrift Savings Plan have proposed opening the program to new investment options, including a Roth feature that would allow tax-free withdrawals of retirement savings.

The proposal, in the form of a bill drawn up for discussion purposes only, would also require agencies to automatically enroll new employees in the TSP and, if they did not select an investment, place them in an age-appropriate “life-cycle fund” instead of the current default option — a short-term government securities fund.

Reps. Henry A. Waxman (D-Calif.), Danny K. Davis (D-Ill.) and Tom Davis (R-Va.) sent their proposal Friday to the Federal Retirement Thrift Investment Board, where officials took it up yesterday. Waxman is chairman of the House Oversight and Government Reform Committee, and the Davises are key members of the panel.

“We regard the TSP as the premier retirement savings program in the nation,” the three said in a letter to Andrew M. Saul, the thrift board chairman. “But we also recognize that the law creating the TSP was enacted over 20 years ago and has been only infrequently updated. The provisions in the discussion draft reflect ideas for modernizing and strengthening the TSP that we believe merit additional consideration.”

Groups representing federal judges and military personnel have expressed interest in adding a Roth option to the TSP, a 401(k)-type program for government workers.

Currently, TSP participants make tax-deferred contributions, and those savings plus any earnings are taxed upon withdrawal, usually in retirement. Contributions to Roth plans are made after taxes have been paid; those savings and their earnings are withdrawn tax-free. That makes a Roth option especially attractive to people who expect their income to rise over time, putting them in higher tax brackets.

TSP officials have not ruled out adding a Roth option, but they said they need time to determine whether such a feature would have broad appeal and how much it would cost to set up. “Our position on Roth is that we need to do some homework,” Gregory T. Long, chief executive of the TSP, said yesterday.

Saul, who noted that he was speaking for himself and not the board, said he doubted that the TSP could implement a Roth option before at least a year to 18 months because the agency needs to complete an upgrade of its computer systems, data storage and security. Last year, the thrift board approved more than $81 million in spending to improve its systems and record-keeping activities.

The board is in favor of automatically enrolling new government hires and steering them into the life-cycle funds if the employees do not choose an investment option. Such policies would encourage young people to save for retirement and permit them to receive matching contributions from their agencies. Life-cycle funds, which include stocks in their portfolios, provide diversification and perhaps a chance for greater earnings compared with short-term government securities.

The thrift board, however, has been less keen on expanding the investment choices in the TSP, which offers stock and bond index funds that mirror the ups and downs of the markets. Officials want to keep a lid on the program’s operating costs and stress that the current lineup of funds covers the major U.S. and international market sectors.

The proposal from the House members would give the thrift board the power to add new funds, an authority that Congress reserved for itself in the law that created the TSP. Saul expressed reservations about the idea, saying the current “checks and balances” approach permits TSP staff to make recommendations, which have to pass muster before the board and Congress.

The proposal would also authorize the board to create “self-directed investment options.” It would permit the TSP to open a “mutual fund window” through which participants could invest in funds that match their interests, TSP officials said.

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