TSP_Constraints.pdf

Discussion of Thrift Savings Plan (TSP) Statutory / Regulatory / Operational Constraints

TSP is open to changing all processes to better fit into a vendor’s operational model:

except for those processes deemed “inherently governmental” constrained by statute (with some exceptions)

…as long as it is performed with appropriate security levels and participant authentication and results in a better outcome for the participants and beneficiaries

To assist with discussions of processes and constraints, the Federal Retirement Thrift Investment Board (FRTIB) has created a discussion of highly customized / more unique processes and how they are constrained, what change opportunities might exist, and how the FRTIB might be willing to change.

Death / Beneficiary Designation

Observed Constraints:

• Explicit Federal Employees’ Retirement Security Act of 1986 (FERSA) requirements for beneficiary designation, custom order of precedence, and definition of “child”.

• Strict compliance requirements for formalities prescribed by FERSA and TSP regulations.

Change Opportunity (if any)

• The TSP could consider (but will not separately pursue) a change to FERSA to remove witness requirement (unlikely to be implemented prior to transition).

• The TSP is open to changing regulatory rules pertaining to processing beneficiary designation forms if compliant with FERSA and facilitates a prospective partner’s processing environment.

• The TSP is open to exploring online beneficiary designation (if possible, given witness requirement).

• Any change(s) must be performed with appropriate vendor security levels and participant authentication.

Spousal Exception Form Review

Observed Constraints

• FERSA requires that the TSP provide exceptions (under specific exceptional circumstances) to spousal consent and notification requirements.

• The current process, while largely manual, provides a benefit to participants and beneficiaries.

Change Opportunity (if any)

• The TSP is open to changes to regulatory rules and policies (if necessary) if they are compliant with FERSA, to facilitate more automated review process, potentially including online workflows and documentation (although such changes may receive Congressional interest).

Manual Withdrawal Requirements (Implications of Spousal Consent)

• Federal Employees Retirement System (FERS) participants and uniformed services participants, spousal consent is required for all withdrawals above $3,500 and all loans and hardship withdrawals of any amount.

• Civil Service Retirement System (CSRS) participants, spousal notification when the participant takes a withdrawal above $3,500 or a loan or hardship withdrawal of any amount.

• Other groups (e.g., judicial branch employees) with FERSA specified consent / notification requirements

Change Opportunity (if any)

• Changes to regulatory rules could be considered (if necessary) if they are compliant with FERSA, to allow changes to receiving and processing forms and withdrawal work flows if they facilitate a prospective partner’s processing environment.

• Any change(s) must be performed with appropriate vendor security levels and participant authentication.

• FRTIB Office of Participant Services (OPS) is currently pursuing a project to explore removal of notarization requirements on several forms.

• Note: This is one of several reasons for manual (form-based) withdrawal

Death Claim Processing

• FERSA rules require customized Order of Precedence

• FERSA has customized definition of “child”

• Diverse Spousal vs. Non-Spousal Beneficiary Account Rules

• The TSP is not constructive on seeking changes to FERSA.

• The TSP is open to exploring opportunities to change the appeals process to add more formality

(e.g., when does an appeal actually become an appeal?).

• Federal government population is more susceptible to fraud due to data breaches and compromised Personally Identifiable Information (PII) – conveying some fraud prevention strategies through paper-based requirements. Any change(s) must be performed with appropriate vendor security levels and participant authentication.

• Changes would be expected to result in cost reductions through increased efficiencies..

Recordkeeper Financial Interactions

• The TSP maintains and will continue to maintain an involved and detailed set of internalized processing requirements related to investment and participant transactional processing and reconciliations and cash management.

• Existing operational environments, policy frameworks, and in certain cases, explicit requirements are present that limit system access and transaction capability to Federal employees due to actions being deemed inherently governmental.

• Uncommon constraints include, but are not limited to:

- Recordkeeper performs no cash movement or investment processing activities

- FRTIB maintains and will continue to maintain internal systems for investment/operations support, cash management, and agency accounting systems requiring automated intra-day, daily, and periodic interface with the recordkeeper

- TSP investments and internal operations require customized cut-off times (12 PM ET) for all participant transaction activities to facilitate investment processing activities.

• Prospective DC managed service providers must understand that the FRTIB anticipates continuing to maintain an involved and detailed set of internalized processing requirements related to investment, participant transactional processing, Treasury and other related reconciliations, and cash management.

• Prospective DC managed service providers must understand that while they may be able to assist with establishing and maintaining streamlined communication flows, supporting the presentation of reconciliation inputs, and enabling systems, they should not assume significant change potential or the adoption of a standard operating environment for interaction with the

FRTIB.

Withdrawal Election Requirements

• Withdrawal election (similar but different to Required Minimum Distribution or RMD) currently required.

• Change may mitigate abandonment requirements.

• Restorals of previously abandoned accounts will remain a trailing responsibility.

• In 2016, 1504 accounts were abandoned and 1,412 accounts were restored.

• Cumulative accounts abandoned (withdrawal election) in previous years and remaining abandoned as of August 2017 is approximately 6,000.

Change Opportunity (if any)

• Congress is considering a bill that would eliminate the TSP’s withdrawal election deadline.

• Once this legislation becomes law, the enforcement process described will no longer exist and

TSP will perform 401(a)(9) RMD distributions without withdrawal election deadline.

• Restorals will remain a permanent requirement.

Forfeitures / Restoral of Forfeitures – Termination of Employment

• FERSA provides several different cliff vesting schedules and a definition of “separation from service”.

• Do not currently foresee any changes in this area unless the vendor identifies a benefit that is not observed at this point – e.g. could explore a change in “31 day break in service” if significant benefits.

Participant Forms Review & Processing

• Witness requirement for beneficiary designation process implemented through a strictly reviewed form-based process

• Spousal consent requirements on money-out transactions that have been implemented to facilitate such requirements.

• OPS is working on building more online wizards and removing hard copy forms that have online wizards with a plan of putting the wizards in a post-authentication online location.

• The TSP is open to identifying forms that are candidates for online submission with appropriate vendor security levels and participant authentication.

Rollovers / Roll-Ins

• Beneficiary participant accounts cannot accept rollovers and transfers. 5 U.S.C. 8433(e)(2)(C).

• FERSA section 8432(j) has never been updated to reflect Economic Growth and Tax Relief

Reconciliation Act of 2001 (or EGTRRA) amendments to the Internal Revenue Code.

Consequently, the TSP cannot accept rollovers and transfers of money that would not have otherwise been includable in gross income, even though similar plans can.

• Of particular relevance and note due to implications on restriction on uniformed service tax exempt money transfer.

• While changes could be sought through legislation to adopt EGTRRA provisions, such changes are not viewed as beneficial at this time unless a clear benefit is identified.

Multiple Account Maintenance / Combination

• Participants / Beneficiaries with several / multiple account types with diverse rules and logical structure (participant under same account number / beneficiary with different account number) within one plan.

• The FRTIB is open to discussing the multiple account maintenance structure and does not convey agreement for any changes although recognition that the number of accounts could be a cost-driver.

• Discussion could include reducing the number of multiple account participants if it is possible, as a practical matter, to provide the benefits and conditions required by FERSA in compliance with the Internal Revenue Code (IRC) and still maintain only one account per participant and/or one account per spouse beneficiary (reflecting different employment statuses in different plans).

• Approaches could include combining accounts or exploring actual separation of plan (Uniformed Services vs. Civilian).

• Separate plans operating in a manner that is seamless / invisible to participants is acceptable as long as it doesn’t result in different participant cost structures.

• Any change(s) must be performed with appropriate vendor security levels and participant authentication.

Investment Fund Transfers

• FERSA requires participants to be able to make an Investment Fund Transfer at least twice a year.

• FERSA requires acknowledgment by a participant of a statement of risk for any participant who invests in a fund other than the G Fund

• The TSP is open to considering modifications to the limitation on monthly Investment Fund Transfers and exploring alternative regulatory implementation (such as charging for frequent trading) if deemed beneficial. Industry needs to be aware that while it appears simple, previous changes received significant public comment and a big and documented benefit must be present prior to seeking to change again.

• Acknowledgment of Risk requirement is unique although it is important to regulators. While it may change somewhat with the implementation of Blended Retirement, the TSP is open to making changes to be consistent with industry standard approaches and the FRTIB is open to alternative means of providing this notice and receiving acknowledgment.

Uniformed Services Employment and Reemployment Rights Act (USERRA) / Military Leave

• The provision of USERRA that relates specifically to retirement benefits explicitly excepts the TSP and cross-references FERSA section 8432b as the applicable provision for TSP benefits.

Key differences:

• Statutory Reference;

• Custom Time Period for Makeup Employee Contributions;

• Custom Lost Earnings treatment;

• Non-standard ability to repay account balance cashed out below the minimum threshold.

Change Opportunity (if any)

• The TSP does not currently foresee any changes in this area unless the vendor identifies a benefit that is not observed at this point.

Hardship Withdrawals

• The TSP must offer hardship withdrawals (provision in FERSA)

• Hardship withdrawals only if currently employed in position eligible to contribute to TSP and withdrawal amount cannot exceed the amount of employee contributions and earnings

• Withdrawals are subject to spousal consent (or notification, for spouses of CSRS participants), regardless of the amount requested. Spousal consent is irrevocable. Hardship withdrawals are not permitted from spouse beneficiary accounts.

• The TSP is open to aligning its hardship withdrawal certification requirements and documentation requirements more closely to the private sector. If necessary, the TSP may be open to restricting hardship withdrawals to elective deferrals rather than elective deferrals + earnings.

• The TSP is unlikely to be able to make changes to spousal consent provisions. The TSP is open to, and favorable toward, adopting polices that align more closely to those of a Qualified Automatic Contribution Arrangement (QACA), but there might be practical constraints to doing so.