Federal Pensions

As of September 1994, about 940,000 federal workers covered by the Federal Employees Retirement System (FERS) were voluntarily contributing an average of 5.7 percent of their salaries to the Thrift Savings Plan. Most of the remaining 300,000 workers covered by FERS who were not contributing were in the lower pay ranges. Lower-paid workers who were contributing were doing so at lower rates than higher-paid workers--an average of 4.4 percent of their salaries. However, lower-paid workers may achieve satisfactory retirement income levels even with low contribution rates because Social Security benefits are proportionately greater for them than for higher-paid workers. Higher paid workers need to defer at least five percent of their salaries throughout their careers--if not more--to achieve retirement income of 60 to 80 percent of their preretirement salaries. Educating FERS workers can play a key role in their making wise preretirement investment choices. Although Thrift Savings Plan materials discuss the plan's financial aspects, they do not explicitly discuss how the Thrift Savings Plan can help workers covered by FERS achieve their retirement income goals. The Thrift Savings Plan Board is seeking legislation that would enable employees to invest in a domestic small capitalization fund and an international stock fund. GAO found that these two additions would make the Thrift Savings Plan's investment options more closely resemble those in similar private sector plans.

GAO found that: (1) as of September 1994, about 76 percent of FERS employees voluntarily contributed an average of 5.7 percent of their salaries to TSP; (2) most of the non-contributing employees were in lower pay grades; (3) lower paid workers contribute less of their salaries to TSP because social security benefits are proportionally higher for lower income workers; (4) these workers may not need to contribute as much to TSP in order to maintain their preretirement standard of living; (5) mid- and high-pay level workers need to contribute at least 5 percent of their salaries over their careers to achieve 60 to 80 percent of preretirement income; (6) although TSP educational materials extensively discuss the plan's financial aspects, they do not explicitly discuss the importance of employee participation in TSP; (7) the TSP Board is seeking legislation that would add two stock fund options to the three investment options it already offers in order to make these options more similar to those available in private-sector plans; and (8) although they carry a higher investment risk, these new investment options could potentially produce higher earnings for plan participants.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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