Unlocking Your TSP’s Potential: Important Information You Should Know

3.8.23: Audio automatically transcribed by Sonix

3.8.23: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Val Majewski:
Welcome back to the Federal Retirement Show. I'm your host Val Majewski with American Benefits Exchange. Appreciate you taking time out of your schedule to join me today. Now today's episode we're going to do something a little different. You may have seen on various platforms where there's a video that has been made and, and other people will bring up that video and then make some comments over it or critiques or make some corrections. And the reason why I'm doing this today is because there was a video that came out or that I saw that had a federal employee in it asking for some financial advice, asking for advice on their TSP, trying to get clarity on something. And I just want to discuss and and add my commentary to it, because there were some things that I'd like to, you know, correct or, uh, elaborate on, evaluate a little bit. And you are welcome to make your own opinion on this. But the reason why I'm doing it is because you can get your information from anywhere. You can get your information from YouTube, Google, Wikipedia, any website, any person, family, friend, colleague.

Val Majewski:
But you want to make sure that you're talking to somebody that is an expert in your federal employee benefits. Now, this show, the Federal Retirement Show, is made for you, the federal employee. We are not going to claim to know every single thing, but this is our area of expertise. This is what we're knowledgeable in and myself and our team. We want to make sure we give you honest and accurate information. And if somebody is saying some things that may may not be entirely correct, uh, we want to correct those and just bring some clarity. Okay. So let's bring up today's video that we're going to analyze a little bit, make some comments on and you can make your own opinion along the way. If you have questions things of that nature go to our website FederalRetirementShow.com fill out our form. We'd be happy to chat with you. Go over your entire benefit situation. Get all of your questions answered. So again, there's a federal employee that's calling in and has some questions about TSP. So let's let's start and we'll pause in different spots.

Caller:
A little nervous right now talking to you. No trouble. How can we help. Yeah. Um I'm a government employee and I'm looking to possibly be tired, um, this coming year. And, um, currently, right now, I have my TSP at about 1.8 million to go.

Dave Ramsey:
Whoa. You're a rock star, man.

Caller:
Yeah, yeah. Um, and and what? The government, they don't say.

Dave Ramsey:
Well, you don't sound real impressed with you. I'm impressed with you.

Caller:
I don't know, it's having that much money. It still makes me a little nervous. Um, but, um, and it's traditional, but, um. Yeah. What the government they provide you with, like, a, um, you know, financial courses and, um, one of the guides who gave the course, I guess he's like a financial guy, and I just said, don't read this, talk to him. And he mentioned something about a fixed indexed annuity.

Val Majewski:
And okay, let's stop there real quick. So this is a federal employee is calling in to the show in order to ask about advice with the TSP. Now granted, they did an awesome job, as was said here on the on the video, that he's done a great job of putting money into his TSP. Went to a retirement briefing performed by. Seems like a financial advisor or somebody that, uh, is giving some advice on what he should do and is talking about annuities. So curious what Dave is going to say about annuities, uh, specifically fixed indexed annuities. So let's keep going.

Caller:
And I know how you feel about annuity, but the fixed indexed annuity, um, you know, he basically gave it a spin where, you know, when the market goes down, it doesn't really go down. And I don't know, I just don't really feel too good about it. And also too, I did talk to one of the smart venture pros and I want to talk to another one. Good. You know, the.

Val Majewski:
I wonder I wonder why he says good after he said the person is talking to a smart investor pro. We'll talk about that at the end here. But all right, let's let's keep going a little further.

Caller:
Interview. Um, but, um, I just want to know, how do you feel about I mean, I don't know much about fixed indexed annuity. I did a little bit of research, but I want to hear it from you. Okay.

Dave Ramsey:
Um, well, basically what we're talking about is an indexed annuity that has a has a floor to it. It's not going to go below a certain return, probably 5% or 6% or something like that.

Val Majewski:
Hold on, hold on. So if we're talking about a fixed indexed annuity, fixed indexed annuity, I just want to be clear on this because again you're getting some conflicting information. So a fixed indexed annuity does have a floor. But that floor is typically 0%. So what we normally say is look you're you cannot lose money in a typical setup due to market conditions. The floor is zero. The worst interest rate you can earn or get credited on a given year is typically 0%. In a fixed indexed annuity, the floor is definitely not 5 or 6%. That'd be an incredible plan. I'd sign me up. Unfortunately, a fixed indexed annuity like that does not exist. Now what does exist? So we're getting some conflicting things. There are annuities out there that guarantee 5 or 6% for a certain period of time. Those are called multi year guaranteed annuities or omegas. So they will provide a set interest rate for a specific period of time. And they can be again as high as 5 or 6% for a three 4 or 5 seven year period. But that is different than a fixed indexed annuity okay. Let's keep going.

Dave Ramsey:
And it's probably indexed. Typically it'll be offer something like the S&P 500 right. In indexed means it's not fixed. Indexed means it follows an index.

Val Majewski:
Right. So let's look at that turn right fixed indexed annuity. So it does follow the interest that you get credited in a fixed indexed annuity is based on the performance of a market index without being directly invested in that index. So here that again fixed indexed annuity. The interest you're credited is based on the performance of the index without it being directly invested in the index. That's how they can keep your floor at zero like we just mentioned. So you can't lose due to market conditions. But you can get credited interest based on the performance of that index. Okay. Let's continue.

Dave Ramsey:
Okay. So, like, have you got, uh, your, your TSP in the C plan?

Caller:
So yeah.

Dave Ramsey:
Okay. So the C is an index. Mhm. That's an index.

Val Majewski:
Fund. C fund. Sorry not the C plan. It's the C fund okay. Let's go.

Dave Ramsey:
So you have an index investment. Now if you have money in the S plan that is an index. It follows a small cap index. Uh and so all you're doing is you find a, a group of stocks that the, uh, weighted average of those stocks represent an index. So an S&P 500 is an index. And so it follows that the problem is not the index. The problem or indexing the problem is not the flaw. The problem is that the annuity fees are double what you are what you get with a mutual fund. And his commissions are four x.

Val Majewski:
What okay. A couple of things there. So the C fund yes, the C fund is meant to mimic the performance of a market index meant to mimic the performance of the S&P 500. So if you ever if you do have your money in the C fund or some version of the C fund, because if you have an L fund, you have some C fund in there and you see that the S&P 500 goes up, then that means your C fund is also up because it's meant to mimic the performance of the S&P 500. But the second thing that was said there is the annuity fees are double what you would get with a mutual fund. Mutual fund fees are half as much as the fixed indexed annuity fees according to this. Now I have to say this is where I will respectfully disagree and need to correct what's being said here. Because fixed indexed annuities, especially ones that just focus on protection and growth. And we're talking again, we're getting some conflicting information here. Fixed indexed annuities protecting your money and having it grow based on market performance. Right index performance typically come with zero fees zero. So not double what a mutual fund is. Those fees are fixed. Indexed annuities typically come with zero fees. Annual fee is 0% zero zero. Nothing. Nada. Fixed. Some fixed indexed annuities do have additional riders or additional features that can come with an additional fee, but those are optional.

Val Majewski:
Those are optional. I'll give you an example. Let's say you wanted a fixed indexed annuity that provided a lifetime guaranteed income without having to cash in your balance, like the lifetime annuity within TSP, so you can keep control of your money and get a lifetime income. You would pay a fee for that, for that privilege, that opportunity typically around 1% per year, maybe a little higher, maybe a little bit less, but that's an optional additional fee. There can be some rate enhancement riders, there can be some additional return of premium riders or things like that, but that will come with an additional optional fee, but a typical fixed indexed annuity. Comes with zero fees, zero annual fees. Now, the types of annuities that will come with higher fees are called variable annuities. So if you ever see the word variable annuity that means you see variable. That's going to mean that your money is directly invested in the market or in some kind of mutual fund within that annuity. And that's where there's a lot of fees built in. And I've typically seen three, four 5% annual fee built into that kind of plan in a variable annuity. Now other fees that they might be talking about could be, um, withdrawal fees, but that's on an annual fee. There could be some other things that that could affect your account, but that's not an annual fee. That's something that we would talk about on the back end.

Val Majewski:
But the misconception here is saying that annuity fees are double what you get in a mutual fund. And that's just not correct. That's just not true at all. The annual fee in a fixed indexed annuity, if you just let if you leave your money in there, don't do anything. It just sits and grows. It's protected from market losses. As we mentioned earlier, the annual fee is 0%. Now let's look at mutual funds because now he was saying that annuity fees are double what you get with a mutual fund. Well, what are the typical fees within a mutual fund. This comes from time magazine. And you can look this up anywhere. But look at the different funds or different sorry fees that can come along with a mutual fund. There can be management fees, broker fees, exchange fees, purchase fees, account fees, sales loads, shareholder fees, total annual fund operating expenses. Even if those fees were just, let's say if we added up all those fees, you got a mutual fund, added them all up, and those fees were half a point 50 basis points, 0.5%, it would still be more than the zero fee that comes with a fixed indexed annuity. So I just wanted to clarify that there are typically zero fees, zero annual management asset fees that are going to come out of your account in a general fixed indexed annuity. But all right, let's continue.

Dave Ramsey:
We would get if he sold you the same mutual fund, same index without without it being in an annuity. And so this guy is this guy wants a commission you need to run.

Val Majewski:
It's interesting just saying that the commissions. Ah, why, he's looking to get that. Uh, we were just talking about all the fees and things that are in mutual funds. Those are fees or commissions that are paid to the broker. Uh, in a lot of cases. So to say that the person is just selling in order to get a commission is interesting. I mean, those who offer fixed indexed annuities and those who offer mutual funds do get paid for their time, right? They do get paid commissions. But let's look at this. Who is going to be responsible for paying commissions? I'm going to back up a second, because those who offer fixed indexed annuities, and I'm not saying that a fixed indexed annuity is the best in every single situation. It's definitely not. It's a case by case scenario. It may not be the best thing for you if you're watching this video, but I also don't want you to get a misconception of what a fixed indexed annuity is based upon this video, because a lot of people are going to watch this. It's a federal employee. They're talking about having a lot of money in their TSP. They're talking about their options with their TSP. And this is not painting fixed indexed annuities in the best light. And people would believe this. Believe every sense or every sentence that is coming out in this video. So let's look at commissions for a second though, because whether you buy a mutual fund or you end up going with a fixed indexed annuity, either one of those plans, there will be commissions paid. Trust me to whoever set up those accounts, whoever the financial advisor is to set up the mutual fund, whoever the advisor is or the, uh.

Val Majewski:
Uh, the broker, whoever it is that's set up the fixed indexed annuity, both of them will get paid commission. Now, just understand where that commission comes from, though. Right. Where does it come from? Who pays the commissions? In the case of a mutual fund, the investor, the federal employee in this case would pay the commission to the broker. That comes directly out of the money. He moves over in this example with a fixed indexed annuity. Where those commissions come from, they come from the issuing insurance carrier, not the investor. So yes, both are going to make commissions. Yes, both are going to get paid for the work that they do. But would you rather your commission if we're just trying to be fair here, right. Not just say this person is trying to get a commission, which commission structure is more beneficial to the investor? In my opinion? I'd rather have the company pay the commission rather than it come out of my pocket. That's just me. That being said, that is not the only reason or the the reason why you'd either buy a mutual fund or a fixed indexed annuity. Yeah, there's circumstances that need to happen and there's different things within your situation that would warrant which plan you go in. I said it's not the best move for everybody, but I don't want you to get the misconception that commissions are that much higher with an annuity than they are with a mutual fund, and that where the commissions are coming from. I don't want you to feel like it's going to negatively affect your account, because with a fixed indexed annuity, they are not coming out of your account. It's coming from the issuing insurance carrier. Okay. Let's continue.

Caller:
Okay okay. I kind of got that feeling. But I said, you know, let me talk to someone, but I just didn't feel right about it. Trust your feeling.

Dave Ramsey:
Yeah. Yeah, your feeling was right. But that's that's all it is. It means it's going to. It's a conservative way that gives you a floor, but you're paying dearly for it. Um, it's not the end of the world. It's not an absolute horrible product. It's not as bad as, like, Old life or something like that.

Val Majewski:
Well, I'll couple a couple things here. Right. So paying dearly for we just said it is a conservative option. So if you're looking at fixed indexed annuity, if you're looking to shoot for the moon right, you want to take some. You're okay with the risk and you're okay with, uh, going for higher returns. Yeah. Maybe a fixed indexed annuity is not the best thing for you because it is a conservative option. There is a floor. You cannot lose money, typically due to market conditions in a fixed indexed annuity. Right. The fees annual fees for your account are generally zero. But understand that you're not paying dearly for it, not paying dearly for it. We just mentioned the fees. The commissions don't come out of your account. Things of that nature. Now I what I really disagree with also, and hopefully you've gathered this from the videos that we've put out, the information we've put out, everybody's situation is different. So without really analyzing this person's situation, this caller without really asking them all of the questions about his pension, Social Security, you know, family dynamic, uh, expenses, what are his desires? What does he want to do with his TSP? What are his goals in retirement? It's impossible to just make a blanket determination on the spot on a call within three minutes to tell this federal employee to run from anything, especially a fixed indexed annuity.

Val Majewski:
Now, I'm not saying, again, that an annuity for this person is going to be the best thing possible. You can't I can't just make a blanket statement saying a mutual fund is going to be horrible, or a fixed indexed annuity is going to be great. I can't do that. I can't, but I don't. I need to know all the variables. So after looking at it all, we might determine that a fixed indexed annuity is a good fit. Or maybe it isn't. You know, you need to dive deep into a situation, not just the three minute call with an expert before making any some suggestion or recommendation, you know? So that's why I said earlier, you have to make sure you're talking to a federal employee. Federal. Uh, sorry, a federal benefits expert that is has been around a little bit, talks the talk, knows the language, understands what you all go through and ask questions to them as well. You know, make sure that you're understanding completely the reasons why they're making any recommendations or providing you information. If something doesn't sound right, if they're telling you to run, run, run, and they're telling they're they're overexaggerating the the negatives on a certain plan kind of understand why. So let's continue real quick here.

Dave Ramsey:
But it's, uh, it's not as good as just a group of mutual funds with your smart Mr. Pro, which will have much lower fees. They make much less commission on you doing that. You got a much better situation. You got $2 million. Um, you need to learn to trust that guy, but they're a really good gut.

Val Majewski:
So I don't. All right. Let's say we came back to the smart investor Pro thing. And we said that in the beginning. I wonder why when the gentleman at the beginning said, um, I'm talking to a smart investor pro and they were shaking their head, good, good. Why is that? Because that is their program. Advisors pay to be a part of that program. And advisors, you know, want to be recommended, want to feel like they're endorsed by this. So just again be careful of the intentions. Right. Be careful of what no matter who it is, myself included. Ask me a lot of questions. If you do talk to us, ask our representatives a lot of questions. Test them on their expertise when it comes to working with federal employees and why they're making the recommendations or the suggestions, or sharing with you the opportunities to do anything with your benefits or retirement information. Ask them why and if they can't explain why, why it's a better fit for you, or why they made that suggestion, or why they're showing this to you, then yeah, maybe you should run. But to make a blanket statement and to say that this person is just looking to make commissions and you're going to pay way too much with this person, but go with this one and they're going to make less commission.

Val Majewski:
And you don't even know all the variables of this person's situation to see if that is the best choice and to just say, hey, go to go with a mutual fund, fixed indexed annuities, um, you have double the fees and all of these things. It's just not true. So I say all this to say why I got a little passionate about this video is because they're talking to federal employees. I don't watch all of this stuff. This was brought to my attention, uh, earlier this week or earlier last week. Sorry. In preparation for for this episode of recording. And I just wanted to say, hey, be careful of everything that you're seeing out there. Be careful of all of the information that is being shared with you. Be careful of who you're listening to and make sure you're talking to an expert and and test their knowledge like I said earlier, we at the Federal Retirement Show an American benefits exchange. We're not going to claim to know every single thing. We can't. But we do know a whole lot. And if we don't have an answer, we're going to find it for you and test us on that. Test us on our knowledge, our expertise and the things that that we're providing to you.

Val Majewski:
And when you see videos like this, don't be afraid to question it right. Don't be afraid to ask for another opinion. Don't be afraid to dig deeper and see what's really going on. And I would hope that if you're looking at your thrift savings plan and looking at all the options that you're, you have an open mind to explore everything. Because what they're talking about in that video may not be the best move for you. It may be, but it also may not be. So you need to make sure that you're looking at all the variables, looking at your entire situation from a holistic point of view to determine what's best for you, your family, your retirement, your future. So I hope you found this this interesting. I know I got a little excited about it. Uh, maybe we'll do more things like this as we go in the future, if you like that. But, uh, really, if you have any questions, you have concerns. You want to review your stuff, go to our website, FederalRetirementShow.com fill out the form. We'd love to be in touch. Share with you, uh, as much as we can about again your situation, give you some more insight into the opportunities, the ways to make or put you in the best situation possible as you move forward through your career and into retirement.

Val Majewski:
Again, you want to make sure you're talking to a federal benefits and retirement expert. So we at the Federal Retirement Show, this is our area of expertise. This is what we do on a daily basis. We speak the language of you, the federal employee. We are not going to claim to know every single thing, but we do know a whole lot. So we're going to bring you as much information. We're going to try and review some things like we did today, as much as we can. So you can get the most accurate and the most essential information that we believe you need. So I just want to say that we at the Federal Retirement Show are not trying to say that Dave is wrong, or is giving bad advice or trying to insinuate anything like that. We just want to make some clarification notes. That's it. So once again, just want to let you know, the clip today that we wanted was courtesy of The Dave Ramsey Show. We appreciate the information they provide. Just wanted to clarify some of the things there. So with that we really appreciate your time today. Thank you for joining us and look forward to seeing you on a future episode.

Producer:
Fixed annuities, including multiyear guaranteed rate annuities, are not designed for short terme investments and may be subject to restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.

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