The Thrift Savings Plan’s Mutual Fund Widow (MFW) is a disaster. Fewer than 0.06% of TSP participants have opened and funded an MFW account.
The TSP charges low fees and expenses for the regular TSP funds. Those electing to use the MFW are not subsidized by those in the TSP community who are not interested in the experience.
The TSP ended 2023 with 6,989,602 account holders, a total of active federal employees and military personnel, including those who kept their accounts in place after retiring or otherwise separating from federal or military service, and inherited accounts.
I have met several TSP millionaires from among the 2% of TSP account owners who have attained that milestone. Not one of them elected to sign up for the MFW. I asked them why, and they answered the associated expenses and fees.
The problem the MFW was designed to solve was to offer greater diversity for TSP participants among their invested assets. The MFW offers roughly 5,000 mutual funds among 300 mutual fund families, including those offered by Fidelity, T. Rowe Price, and Vanguard. For funds with multiple classes, the lowest expense ratio class is provided.
The MFW fees include:
- A $55 annual administrative fee to ensure that the use of the mutual fund window does not indirectly increase TSP administrative expenses for TSP participants who choose not to use the mutual fund window
- $95 annual maintenance fee
- $28.75 per-trade fee
- Other fees and expenses specific to the mutual funds you choose
Additionally, you may not invest more than 25% of your total account balance in the mutual fund window at any time. TSP participants who choose to invest through the mutual fund window pay fees that do not apply to participants who invest only in TSP funds.
- Your initial transfer to the mutual fund window must be $10,000 or more but may not be more than 25% of your total TSP savings.
- You must have at least $40,000 in your TSP account to ensure that your initial transfer isn’t more than 25% of your total TSP savings.
So, if you were to use the MFW to purchase $1,000 per month in certain no-load Fidelity mutual funds during the year, you would have surrendered to the MFW folks at least the following:
- An annual maintenance fee = $95
- A annual administrative fee = $55
- 12 trades X $28.75 = $345
Using the MFW also means transferring the annual administrative fee and maintenance fees to be withdrawn proportionally from all the TSP funds in your account on the last business day of the month of your initial transfer.
The TSP Mutual Fund Window Fact Sheet addresses the trade fees and other warnings.
The sheet warns you, “Unlike our low-cost TSP funds, mutual funds available through a brokerage account aren’t vetted by a plan fiduciary to determine whether they are wise investments. You must carefully review each mutual fund’s prospectus and decide which will meet your investment goals.”
If you used the MFW to purchase 12 monthly $1,000 investments in certain Fidelity funds, that means your expenses would work out to be $41.25 allocated per $1,000.
Alternatively, you could open a Fidelity account that is not associated with the MFW. The account could be configured as:
- a traditional IRA,
- a Roth IRA, or
- a taxable account
To purchase Fidelity mutual funds and avoid the total $495 MFW expenses, you could open a Fidelity account and send a $1,000 monthly payment.
Going directly to an external fund family means you do not have to submit to the complicated MFW regulations and restrictions. If you have questions, you can speak with a representative of the external fund family. More importantly, it would be best not to tolerate hundreds of dollars subtracted from your TSP annually to pay MFW fees and expenses.
You have flexibility by not having to deal with the TSP process. Fidelity, Vanguard, Schwab, and others will answer their phones in the evenings and on weekends to assist you.
Don’t be surprised if some Fidelity, Vanguard, and Schwab employees hold a Certified Financial Planner, Certified Public Accountant, or other financial designations.
Don’t expect the same experience from the TSP. The difference is that Fidelity, Vanguard, Schwab, and others are competing for your business.
