Should You Invest in the TSP Mutual Fund Window?

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In 1986, the Thrift Savings Plan (TSP) was created as a retirement savings plan available to federal employees and military service members. Currently, TSP investors can choose between five, index-based Individual -- or Core -- Funds and 10 Lifecycle Funds.

TSP has been modified several times to keep up with evolving norms and expectations in the investment world. Lifecycle Funds were introduced in 2005 to make it easier for TSP investors to automatically reduce their risk exposure as they get closer to retirement. In 2012, the Roth TSP became an option. In 2018, the military switched to the Blended Retirement System (BRS), where the government matches your TSP contributions. And TSP withdrawal options were significantly enhanced in 2019.

Another change is coming this summer in the form of a mutual fund window. TSP participants will have a new option to invest TSP assets into individual mutual funds. Mutual funds are pools of collective money that are invested and actively managed by a portfolio manager. This is different from the current TSP funds, which are passive investments -- portfolios set up to match major financial indices without the oversight of a portfolio manager.

Over the years, one of the greatest strengths of the TSP has been that it's easy to use and it incurs low costs. The mutual fund window adds both cost and complexity, and participants must decide whether the benefits are worth these trade-offs.

Who Is Eligible to Use the Mutual Funds in TSP?

Though you are eligible to participate in the TSP -- because of military service or federal employment -- you may not be eligible to invest in the TSP mutual fund options. Here are the eligibility requirements:

  • You must make a minimum required investment of $10,000.
  • You should have a minimum TSP balance of $40,000 because only 25% of the balance can be invested in mutual funds.

What Does This Change Mean for You?

As a TSP investor, you have the choice of how much you invest and into what funds. Up until now, there have been a limited number of investment options. The mutual fund window being added this summer adds more than 5,000 mutual funds for participants to consider. As with any new program or option, there are pros and cons to the decision.

Reasons to Invest

One of the biggest benefits of investing in mutual funds is the opportunity for greater diversification. Proper diversification across a variety of asset classes is an important factor of long-term investment performance. It's important to consider the diversification of your TSP assets in the context of your overall retirement portfolio, including assets outside TSP. 

Mutual funds also allow investors to access professionally managed portfolios. An experienced investment professional actively manages the mutual fund assets. In theory, these funds are more responsive to market fluctuations and able to outperform their passive counterparts over the long term. (Based on historical performance data, the results have been mixed.)*

Reasons Not to Invest

Investing in the TSP mutual funds isn't the best choice for everyone, so make sure to consider the negative points as well. Fees are an important consideration. The total cost to invest in the current TSP funds is among the lowest available in any retirement plan. The actively managed mutual funds will have higher operating expenses. Additionally, participating in the mutual fund window incurs annual fees that total $150, plus a $28 charge for each trade.

Another factor to consider is the complexity of selecting funds and managing the account. The mutual fund window allows investors to choose from more than 5,000 funds! This can be an overwhelming task. (By contrast, most private-sector retirement plans offer only a few dozen options.) Additionally, given the $28 fee per trade, those who want to use the mutual fund options may want to make periodic lump-sum transfers rather than automatic monthly contributions. This requires more active oversight and management of the account by the participant.

Final Thoughts

Like most financial decisions, the choice to use the new investment options in TSP will be based on a variety of factors. Participants should carefully consider both their ability and desire to actively manage their TSP account before opting into the mutual fund window. For those who prefer a more hands-off approach, the current investment options may be the better choice. 

For most service members and federal employees, TSP is a major component of their overall retirement plan. Making the right investment decisions with this money can have a long-term impact. Using a financial adviser who is familiar with the TSP can be helpful when deciding whether the mutual fund options are right for you. 

Need Help Deciding What to Do? 

First Command can help you figure out the best option for your financial future. We proudly develop complimentary financial plans for eligible active-duty service members. 


*Cited source:

"In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons; only 25% of all active funds topped the average of their passive rivals over the 10-year period ended June 2021; long-term success rates were generally higher among foreign-stock, real estate, and bond funds and lowest among U.S. large-cap funds."


©2022 First Command Financial Services, Inc. parent of First Command Brokerage Services, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities products and brokerage services are provided by First Command Brokerage Services, Inc., a broker-dealer. Financial planning and investment advisory services are provided by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are provided by First Command Insurance Services, Inc. Banking products and services are provided by First Command Bank (Member FDIC, Equal Housing Lender). Securities are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. TSP accounts have very low administrative and investment expenses, and low expenses can have a positive effect on the rate of return of your investment. First Command Financial Services, Inc. and its related entities are not affiliated with, authorized to sell or represent on behalf of or otherwise endorsed by any federal employee benefits programs referenced, by the U.S. government, or the U.S. armed forces. 

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