2006 was a good year for stocks and funds

Federal Workers

January 05, 2007|By Melissa Harris

Most federal workers will smile when they review their end-of-year statements from the government's retirement plan.

In 2006, all of the Thrift Savings Plan's 401(k)-style investment funds outperformed returns from the previous year.

The international fund - a mix of stocks from companies in developed countries - grew a whopping 26.3 percent in 2006. Domestically, the C fund, which culls stocks from the 500 largest publicly traded or "blue chip" companies, rose 15.8 percent, and a mix of stocks from the rest of the market, the S fund, rose 15.3 percent.

The F and G funds, which are different from the other three funds in that they invest in more conservatives bonds and not stocks, grew between 4 and 5 percent, respectively.

The program's newest feature, called Lifecycle or L funds, pulls from those five funds and balances them based on a worker's expected age of retirement. The younger the participant, the riskier the investment..

The lifecycle funds also performed well in 2006, earning between 7.6 and 16. 5 percent returns.

"These are incredibly good results," said Gary A. Amelio, the 401(k)-style plan's executive director, in an interview this week. "The international fund, that's an outstanding return by any standard."

More than 100,000 people were added to the plan last year, and for the first time, the plan crossed the $200 billion mark in assets, gaining ground on the world's largest retirement fund, the California Public Employees' Retirement System, or CalPERS.

"That came about from a combination of facts; contributions exceeding distributions and investment growth," Amelio said.

During 2007, Amelio said workers and retirees can expect the long-awaited results from the fund's first participant survey. The results were supposed to have come last year, but Amelio said the length of the questionnaire - about 40 questions, many of which had subparts - resulted in the agency lacking enough responses to do the in-depth analysis it wanted.

For instance, Amelio said plan directors want to identify the preferences of younger workers vs. older workers, men vs. women, and civilian vs. military enrollees.

"Looking at these demographics more closely helps us in our product development," Amelio said. "We did our first go-around in December, and now we're going back and getting more responses."

Amelio said participants should expect results in March or April.

The plan's board will debate this year whether to ask Congress to make three changes to the plan.

The first involves changing the "default" fund from the G fund to whichever L fund is appropriate given the enrollee's age. The default fund would only be used when a participant hasn't set his or her own preferences. Amelio said he supports this change.

The two other items on the agency's legislative agenda are more uncertain. The first is to make enrollment in the plan automatic. Amelio, however, expressed concerns about that change.

"Even if a very small percentage of people filled out the paper work to get out of the plan, that would mean 50,000 to 100,000 removals that staff would have to do manually," Amelio said. "And if money had already seeped into an account, would we have to repay it? And what if their investments grew in that time? There are a lot of issues to work out."

Amelio described the final change up for debate as "the diciest." Called a "Roth 401(k) feature," participants would be able to contribute to the plan after taxes had been deducted from their paychecks.

That wouldn't reduce a person's current taxable income, but when distributions begin during retirement, participants would not pay taxes on the after-tax investments or the earnings from them, said Thomas Trabucco, the plan's director of external relations.

One group that would benefit from the Roth feature and is lobbying for it is federal judges, Amelio said. Most federal judges receive their salaries until death, meaning their income is likely to be higher in retirement. Thus, the tax break on those earlier contributions would be more beneficial to them in retirement.

People who earn little and pay little or nothing in federal income taxes may come out ahead under a Roth feature.

"It's an added benefit, but there's so much complexity to it," Amelio said. "The true genius of the Thrift Savings Plan is that we keep it simple. There's a reluctance to push this forward."

The writer welcomes your comments and feedback. She can be reached at melissa.harris@baltsun.com or 410-715-2885. Recent back issues can be read at www.baltimoresun.com/federal.

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