Q. I believe one of your previous columns indicated that the management fee of the TSP is far less than private sector investment firms. Could you provide scenarios comparing TSP vs. other well-known funds: Please include USAA on the list. For planning purposes, assume $200,000 in the account.
A. There are thousands of funds out there, so I’m not about to spend hours doing your homework for you. I will give you an example, however. According to the TSP’s website, in 2010, the TSP’s funds cost their investors 0.025 percent to operate. So if you invest your TSP assets in a portfolio consisting of 30 percent C Fund, 20 percent S Fund, 10 percent I Fund and 40 percent F Fund, for example, your portfolio’s weighted average expense ration would be 0.025 percent.
According to Morningstar, the average expense ratio for their funds is as follows: domestic stock funds 0.86 percent, foreign stock funds 1.19 percent and taxable bond funds 0.57 percent. A similarly weighted portfolio composed of these “average” USAA funds would produce an expense ratio of 0.777 percent. If the expected market return for each of these similar portfolios were 8 percent per year, then the TSP investor can expect to realize 7.9975 percent per year and the USAA investor can expect to realize 7.223 percent per year.
Starting with $20,000 and applying these expected rates of return over 30 years, the TSP investor should expect to have an account worth $201,113 in the end, and the USAA investor should expect to have $162,057, or about 19.4 percent less than the TSP investor.
The results will depend upon the actual expense ratios for the funds you’re comparing and the expected rate of return for the portfolios, but you get the idea.
