Congress is poised to add three benefits to the popular Thrift Savings Plan.

• A Roth 401(k) option, which would let participants put some or all of their after-tax salary into an account that will grow without tax liability on future earnings.

• A survivor benefit that would allow spouses of deceased TSP participants to maintain TSP accounts.

• A mutual fund option that would allow participants to direct their TSP funds to private-sector mutual funds.

All three are included in a bill passed by the House this month and which is expected to move quickly through the Senate. The bill, HR 1256, also would automatically enroll new civilian employees in the plan.

It is unclear, however, if the bill's provision authorizing a mutual fund option will survive — a TSP official is pressing key senators to strip it or change it.

The Senate is likely to vote on the bill before the Memorial Day recess, said Tom Trabucco, who handles legislative and public affairs for the board that oversees the TSP.

"This legislation could very well move through the Senate during this time. There's support for it, and it's on a relatively fast track," Trabucco said.

Backers of the new options say they will keep TSP's offerings on par with private-sector retirement plans.

The addition of a Roth option would be especially appealing to military personnel because they typically fall into lower tax brackets early in their career and finish their careers in higher tax brackets.

Two of the features — the Roth option and the spouse benefit — won a key endorsement last week from the board that governs TSP, the Federal Retirement Thrift Investment Board. Both features had previously been endorsed by another important player, the Employee Thrift Advisory Council, an advisory council comprising various federal unions and manager groups.

The groups' backing for those benefits is expected to pave the way for their quick approval by Congress.

But the two groups stopped short of endorsing the mutual fund option, largely on grounds that such an option would pose too much risk to participants and overly complicate TSP. But some lawmakers appear anxious nevertheless to include that among the proposed changes. Staffers on the House Oversight and Government Reform Committee said the TSP board's lack of an endorsement for the mutual fund option doesn't lessen the committee's support for it.

"We are still committed to getting the mutual fund included ... in the final bill," one staffer told Federal Times.

Roth 401(k)

The Roth option would be a change from existing TSP funds, in which participants make pretax contributions and then pay taxes on the earnings at retirement.

A November survey conducted by TSP shows most plan participants want the Roth option — 56 percent of all participants and 63 percent of those in the military. Military service members are most likely to benefit from the Roth, since their early career tax rates tend to be lower than other federal employees, TSP executive director Gregory Long said.

"When it comes to the uniformed services, this is a game changer," Long said.

Chuck Witschonke, representing the Defense Department on the employee advisory council, said the Roth option was the uniformed services' "No. 1 issue to improve TSP."

Another group pushing for the Roth option is federal judges. They don't get any benefit from waiting until retirement to pay taxes on their earnings because they earn the same high salary in retirement that they earned while employed.

However, adding the Roth option to the plan is a "very major undertaking," said Renée Wilder, TSP's director of research and strategic planning. The changes that would be required, which could take one to two years to complete, include:

• Modifying TSP's recordkeeping, accounting and payroll systems to accept and properly track Roth contributions and distributions. These changes would cost about $1.3 million.

• Updating agency payroll systems to add the Roth component.

• Changing TSP enrollment and loan forms, tax notices and communications materials. Those changes would cost about $5 million.

In addition, participants have signaled that they would need financial and tax advice to help them decide whether or how to invest in the Roth option. TSP currently doesn't offer that type of investment advice, and providing that service could cost between $4 million and $6 million in the first year and between $1.5 million and $2.5 million annually thereafter.

The board agreed that it would continue TSP's policy of offering education, not advice, pending a formal proposal from the TSP staff to make the change.

Board member Thomas Fink voted against adding the Roth, arguing that too few people will participate to justify the large expense that will be incurred by all participants.

But Long said a Roth option is needed to keep TSP competitive with other retirement plans.

"Five years from now, if we don't have a Roth, it would be difficult for us to make the case that we're still best in class," Long said.

Mutual fund pros and cons

The TSP board split 2-2 over the proposed addition of a mutual fund option.

As proposed by the TSP administrative staff, participants would be able to invest in a broad range of mutual funds chosen by a brokerage firm hired by the board. Costs associated with these transactions, including a monthly charge from TSP to cover maintenance and administrative costs, would be passed on to those participants investing in a mutual fund. The staff recommendation would not allow for participants to purchase stocks from individual companies and would limit total mutual fund investments to half of TSP account balances.

Allowing participants to put as much as 50 percent of their TSP balances in a mutual fund option is "way too high," said James Sauber, chairman of the employee advisory council and chief of staff of the National Association of Letter Carriers. Too many people would not understand the risks and make foolish choices, he said.

"Our role … is to look out for the interests of our members," he said.

The House-passed bill is different: It directs TSP to select the mutual funds that would be available to plan participants. But TSP staff said this would present too many administrative, logistical and political challenges.

The House bill only authorizes — but does not require — TSP to offer a mutual fund option, however. And if the House version of the mutual fund is approved, "we'd never do it," Long told the employee advisory council.

Another House staffer said in an interview that the committee is open to revising the mutual fund proposal to address the TSP staff's concerns.

TSP's Trabucco told the employee advisory council he is working with the offices of Sens. Edward Kennedy, D-Mass., and Joseph Lieberman, I-Conn., to have the mutual fund language changed or removed. While the TSP staff has no mandate from its board or council to seek the change, "we would not want a suboptimal approach in law, even if it's not required."

Long and others recommended that the mutual fund be added to discourage attempts by lawmakers or third-party groups to add new funds to TSP, such as socially responsible investments or real estate investment trusts (REITs). Those narrow funds would be open to participants through the mutual fund option.

"It allows access to individual funds that have a narrow focus, like REITs, that we're not likely to offer," Long said.

Some board members said the mutual fund option could weaken the overall TSP program.

"What's made this plan the success that it's been has been its simplicity," said Board Chairman Andrew Saul.

Updating the record-keeping system to include the mutual fund would cost about $1 million, Long said, while revising communications materials to reflect the new fund would cost up to $2 million.

Spousal accounts

The other proposal endorsed by the board and council would allow spouses of TSP participants to stay in the plan after the participant dies. Current rules require spouses who are beneficiaries of the participant's account to transfer the benefit within 60 days of the participant's death to an individual retirement account or take the benefit as a cash withdrawal, which is subject to a 20 percent federal tax withholding.

The proposed change would allow spouses to keep their benefits in TSP and give them the same withdrawal options as retired participants.

Spouses eligible for the accounts would be determined according to guidance from the Office of Personnel Management, which currently limits benefits to married, opposite-sex spouses of plan participants. If the rules were expanded to include same-sex spouses or domestic partnerships, TSP would adopt those rules, Trabucco said.

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