DOLLARS and SENSE.
( or-- Dad, will you please check my math?)
When the Thrift Board was discussing limits to the ability to reallocate your money, the key reason they cited was costs. According to the TSP Thrift Board, allowing all you pesky TSP share holders to move your money around was just too darn expensive!
They went on a P.R. campaign to convince the public that moving money around costs the average TSP BUY AND HOLD share holder millions of dollars. And many were fooled into thinking this is the case.
In fact, most major media outlets didn't question a thing. They simply reprinted the material the Thrift Board put on their website, and called for limits to be imposed.
It appears many others simply are taking the word of the Board, without looking into the data for themselves.
Of course, they were not looking at the whole picture.
The math tells a much different story.
Now, my 11-year old son is working through sixth-grade math.
Last month we worked together on multiplying and dividing fractions, and are working our way through decimals right now. It's been a while since I had to find the common denominator, and I haven't had to multiply big numbers by decimals in some time.
But it refreshed my memory banks quite a bit, and gave me an opportunity to run the numbers over on the Federal Thrift Board's website through some pretty extensive analysis. The FRTIB Website electronic reading room is at: http://www.frtib.gov/ . You can find the Board Minutes and data for each month there.
That's right, I, like many others, took the time to actually look at the data, and crunch the numbers. And here is what I found:
The Thrift Board separates two kinds of dollar values. One is being called "Tracking Error", and the other is called "Trading Costs".
Both contribute to the bottom line of what kind of return the TSP Shareholder received in his/her funds.
Tracking error is really a misnomer. It isn't an error that is bad. It's actually just the difference between what the Index does for the month, and what the TSP Share performance comes out. If the TSP share doesn't do as well as the Index, then it's a cost. If the TSP share does BETTER than the index, then it's cash gravy that goes to the shareholder's account.
In order to properly understand the costs and benefits, you have to count BOTH tracking error, and trading costs when talking about trading funds.
It is, in part, the trading costs that make up part of the expenses we're talking about, and trading costs that the Thrift Board is saying is the reason that Interfund Transfers should be curtailed. But the trading costs are only part of the story, and here is where the Thrift Board is wrong in their math.
In October, 2007, it is true that more people moved money between the I fund and the G fund that the same period a year ago. In fact, the amount moved between funds went from about a half-a-billion dollars being moved, to over 4 billion dollars being moved. Remember, over all, the amount of money in all the TSP funds grew from 97 billion dollars in 2002, to over 235 billion dollars by 2007.
The 2006 Year to Date through October 06, trading costs for the I fund accounted for 4.1 basis points for the month, and 10.7 basis points, or about $11 million dollars for the 10 months up to that point.
But by October of 2007, when the dollar amount being traded doubled, trading costs accounted for only 3 basis points for the month, and 5.8 basis points for the year to date in costs. That's about a 47% DECREASE in costs.
Pretty good, if you ask me.
If the story ended right there, I'd say the TSP was pretty dog-gone successful in managing costs. To most people, a 47% decrease in costs on a 130% increase in volume is a good thing.
But here is the kicker to the story.
You have to also include the "tracking error" when you find out whether TSP Participants are better off, or worse off, then before.
For the I fund, the one that the Thrift Board is most concerned about, the Tracking Error works like this:
Each Day, the seller, Barclays, puts a price on the shares. Sometimes Barclays misses by a penny or two. Sometimes a little more. If they are too conservative, anyone selling that day loses the pennies. The TRADER loses the pennies. If they are too liberal, they make an extra penny or two on the sale.
Is "tracking error" bad? Not at all. The word "Error" throws most people for a loop. All it means is that Barclays didn't guess exactly right. It all has to do with "Fair Value", as we talked about in previous issues of the newsletter.
Who pays for "tracking error"? The person who bailed out of the fund.
Who benefits from "tracking error?" The person who is in the fund. They get to pick up the extra Fair Value error pennies.
Now, someone who is simply buying and holding gets their penny added back in the next day. It's like nothing ever happened from their account. Barclays corrects the error by paying out the extra penny to anyone who is in the I fund that next day. So it's no sweat for buy-and-holders. But an active investor who sells could lose the pennies.
Who gets the pennies the active investor loses? The buy-and-holders do, that's who. They get to split the pot of extra money that is then repaid the next day by Barclays. They are the ones who benefit from "tracking error."
If someone sells shares, and looses the penny, well, they take the loss and move on. The Buy-and-Holder benefits.
In October 2006, this tracking error led to an extra 1 basis point being added to the buy-and-holder's funds.
But in October, 2007, because of the eight fold increase in moving money around, the tracking error accounted for 56 basis points-in the favor of those who "buy-and-hold." Those pennies taken from the people who moved their money added up pretty good. Having 4 billion dollars move into and out of the I fund during the course of the month resulted in a lot more of those little pennies being picked up by the people who sat tight and watched it rain pennies from heaven. That's $153 MILLION added to I fund account holders in October alone.
In short, "trading" is very good for the buy-and-hold crowd.
Yes, it cost $1.3 million in October, and 13 million in trading costs through the entire year. At first glance, that may seem like a lot. But look deeper:
And as a result, the Buy-and-Hold crowd MADE $151 million dollars that month, above and beyond what the Index did, for doing nothing more than sitting in their "I" fund.
And for the year to date, buy and hold "I" funders have picked up $216 MILLION in pennies from those who have reallocated money.
I explained it to my 11-year old son, and he checked Dad's math. We have a common denominator- we agree that the $13 million dollar investment in trading costs was a pretty good one, seeing as it returned over 16 times as much back in just ten months, to the ones who are just sitting in the I fund.
It's too bad the Thrift Board doesn't see the benefit in allowing people to control their own money. Especially since it not only allows them to control their own financial future, but it also contributes significantly to the bottom line for everyone else.
Moving money around doesn't cost the 3.8 million shareholders money. Interfund Transfer reallocations by others are MAKING MONEY for those who buy-and-hold. Making them MILLIONS.
They benefit from it, without having to do a thing. The math proves it.
And even my 11-year old thinks that's a good deal.
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OCTOBER RESULTS:
Here are the actual results from the I Fund in October, 2007, as a result of the increase in interfund transfer activity:
Total amount held in the I Fund as of Oct. 31, 2007: $ 27,375,000,000
I Fund:
Total Amount Interfund Transfered: $ 4, 339,906,198
Cost to execute all I fund transfers: -$1,316,786 (.0003%)
Tracking Error Profits to other I fund Holders: $ 153,300,000 (.0056%)
Net Profits to Buy and Hold "I" fund Share Holders: $ 151,983,214
Source Link:
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HELP SPREAD THE WORD |
We are asking you to help spread the word. This is wrong, and more people need to know about the issue.
We ask you to tell three friends this week. Help educate them about the misguided decision to limit the retirement options of federal employees and U.S. Service members, and how employee rights need to be secured.
Ask them to sign the petition, and ask them to sign up for the newsletter. And then ask them to tell others as well.
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MORE THAN 2,800 HAVE SIGNED THE PETITION
Our petition against imposing TSP Interfund Transfer limits continues to grow. More than 2,800 Federal Employees, U.S. Military military members, and retirees have already signed the petition to reverse the decision of the Thrift Board to limit Interfund Transfers.
From Maine, to Alaska, to California, and everywhere in between, those who hold shares in the TSP are objecting to the proposed limits.
Here is a sample of what people are saying:
Jan 4, 2008, Joan W. BITTNER , Alaska
We are encouraged to take personal responsibility in our fund allocations, yet now within artificial/arbitrary limits. Shareholders must have a say in the disbursement of their investments, and require access when deemed necessary by the individual investor, not per someone else's "standards." Please allow TSP shareholders the power to manage their portfolios as we deem to be in our best interests, to yield TSP output that will be required by us, to facilitate best outcomes, in retirement.
Jan 4, 2008,David Shaw , Virginia
This is not how things are done on the United States. As a shareholder, I was not given any choice in this decision.
Jan 4, 2008,Anonymous , Maine
At the very least, 4 trades a month should be allowed.
Jan 4, 2008,Anonymous , New Jersey
All decisions by the Board need to be above board and honest. Any hint of back door politics is a disgrace and a disservice to all members
Jan 4, 2008,Kathleen Freeman , Maryland
This is a huge decision for which the board solicited no feedback from TSP participants. Want the decision rescinded.
Jan 4, 2008,Dean Williams , California
Please, please... don't limit my input to my own retirement vehicle! I have served my country in the armed forces and in federal law enforcement for over 20 years. I have earned the right to invest in my TSP the way I want. Before you make your own draconian decisions in a dictatorial fashion, why don't you solicit responses from the people who have the most to gain or lose from your proposed changes? THE TSP INVESTORS. Here is a recommendation or two. Why don't you have a section on the TSP website that allows the TSP investor to choose whether or not they want limited access or unlimited access to their TSP accounts? People that choose limited access will remain in their current TSP accounts with their current fee structure. The personnel that choose unlimited access will probably more than happy to pay a slightly increased fee structure to cover the operating costs for their increased TSP activity. That way everyone is happy. You could have an open season, once a year, where everyone has the opportunity to change from limited to unlimited and vice-a-versa. If that is not to your liking than I say don't fix what isn't broken!!! Respectfully submitted, DW
Jan 4, 2008,ROBERT ALLEN , West Virginia
I CAN NOT BELIEVE HOW SUCH A MAJOR DECISION CAN BE MADE WITH OUT SOME INPUT FROM THE USER. I MAKE MOVES FREQUANTLY AND MADE 21% RETURN IN 06 BY MAKING MOVES. CHARGE ME $5 A MONTH BUT DO NOT TAKE THIS RIGHT FROM ME
Jan 4, 2008,Stephen Nagy , Colorado
Imposing transfer limitations in a volatile market, is essentially robbing my retirement future. |
 YOU can sign the petition, and YOU can ask your coworkers to sign the petition, at this web address: http://tspshareholder.org
Know of someone who is still in the dark? Help them learn the truth. Send them a message- that you would like them to learn more BEFORE their rights are taken away. Educate them. Ask them to learn more.
You can forward this e-mail to a friend by clicking here: 
You can tell your Union or your organization that you want THEM to weigh in against setting artificially low limits on TSP Interfund Transfers.
Your freedom, and your retirement income, will depend on ALL of us stepping up to speak out. | |
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