This article discusses the origins of Thriftplans on an international level and how it is used to augment employee benefits.

In several countries such as the USA these plans make up predominantly the Social Security system implemented. This article will discuss how the 401K was established and what we can learn from it.

The Thrift Savings Plan (TSP) is a retirement plan similar to the 401(k) plan offered to private sector employees. In addition, TSP is very similar to popular programs found in the private sector, allowing for pre-tax contributions, employer matches, and long-term earning potential in various funds. Regardless of the retirement system, participating in the TSP can significantly increase retirement income, but starting early is essential. Contributing early gives the money in your account more time to increase in value through the compounding of earnings. Thrift plans are an option to encourage savings and employee retention. It offers employees more power over their investment decisions and a more comprehensive range of investment options at varying levels of risk and savings potential.

Making the Most of Your Thrift Plan

TSP contributions are payroll deductions. You have to make a contribution election through your agency or service to:

• Start your contributions if you were not automatically enrolled.
• Increase or decrease your contributions if you were automatically registered.
• Change the number of your employee contributions or tax treatment (traditional or Roth).
• Stop your contributions.

The purpose of the TSP is to give you a long-term retirement savings and investment plan. Saving for your retirement through the TSP provides many advantages, such as:

• Automatic payroll deductions.
• A diversified choice of investment options, including professionally designed lifecycle funds.
• A selection of tax treatments for your contributions.
• Low administrative and investment expenses.
• Under certain circumstances, access to your money while you are still employed.

The TSP offers two tax treatments for your employee contributions when you make a contribution election:

1. Traditional TSP. If you make traditional contributions, you defer paying taxes on your contributions and earnings until you withdraw them. If you are a uniformed services member making tax-exempt contributions, your contributions will be tax-free; only your profits will be subject to tax at withdrawal.
2. Roth TSP. If you make Roth contributions, you pay taxes on your contributions as you are making them and get your earnings tax-free at withdrawal, as long as you meet the requirements to qualify.

TSP Employer Benefits

Although a Thrift plan is a valuable benefit for employees, employers also gain several advantages from sponsoring a retirement plan with a high level of participation. Some of the benefits to the employer include:

Improved employee satisfaction and retention: In addition to using a Thrift plan as a recruitment tool, offering this benefit to employees can improve their satisfaction and encourage longer-term retention.

Tax benefits: Employer contributions are deductible up to a specific limit, lowering the company’s taxable income. Additionally, small businesses may be eligible for a tax credit when starting a new Thrift plan.

Competitive advantage: A Thrift plan can be a competitive advantage when hiring employees for small businesses.

Lower fees: More plan assets and participants may yield fee discounts from the plan provider.

Employers can contribute by matching employees' contributions up to a certain amount as an added benefit to increase their savings. There are also tax savings opportunities for employers that offer a company match to plan participants, as contributions are tax-deductible up to applicable IRS limits. By encouraging all employees to participate, as an employer, you’ll avoid the notion that the Thrift plan exists only for the benefit of higher-paid employees.

How Does the TSP Differ From the 401(k)?

In many ways, the two tax-advantaged retirement plans are similar. However, there are some critical distinctions. For example, 401(k) participants choose from a menu of investment choices selected by their employer. The options for TSP participants are more streamlined; the plan includes target-date funds and five individual index funds. However, the investment fees within the TSP are lower than those of most 401(k) plans.

TSP and 401(k) share several similarities as follows:

• While the TSP isn’t technically a 401(k), it is a defined contribution plan, just like a 401(k). Defined contribution means your employer will contribute a specified amount toward retirement for you, subject to certain rules.
• The TSP offers both traditional and Roth options, as does 401(k). Contributions to the traditional option are taxed deferred and reduce your taxable salary, but any future withdrawals are treated as taxable income. Roth option contributions are not tax-deductible, but future withdrawals aren’t taxed. Your specific financial situation will dictate better options when it comes to the traditional TSP versus the Roth TSP.
• Limits on TSP contributions are equivalent to those for 401(k) plans. For 2022, that amount is $20,500 plus an additional catch-up contribution of $6,500 for employees age 50 or older.
• Once you are no longer an employee, your traditional and Roth balances can be rolled over into an IRA or a Roth IRA.
• The Thrift Savings Plan has provisions covering both in-service distributions (i.e., withdrawals while you are still working) and a TSP loan option.
• Due to IRS rules, both the TSP and 401(k) plans require you to begin withdrawing from the accounts once you reach the age of 72. However, you can avoid taking a required minimum distribution, as these withdrawals are named if you have not yet separated from service.

Implementing TSP in the MENA Region

Boosting private retirement savings, especially among half of all middle eastern workers who are not enrolled in an employer-based retirement savings plan, is an exceedingly important public goal. Social security, which was always designed to be a supplemental retirement savings program, cannot provide the levels of savings required by citizens retiring at 65 years of age. But today’s existing employer-based savings plans are not structured well to ensure adequate retirement savings for most locals who possess access to these plans.

The TSP is very similar to the more known 401(k) plan, which was created under a provision in the Revenue Act of 1978. It was intended to provide workers with a means of supplementing retirement income from traditional defined-benefit pension plans, the most common form of pension plans. Employers assume the investment and other risks associated with managing retirement accounts in defined-benefit programs. Still, in defined-contribution plans like 401(k)s, risks are borne entirely by the worker. Since then, however, 401(k)s have become the primary employment-based retirement savings vehicle for many workers worldwide.

Introducing TSP to a larger scale in the MENA region means that decision-making parties shall revise current reforms to existing 401(k) and IRA or other alternatives and understand that increasing access to retirement plans is not enough. Plan design matters greatly for retirement security and can make the TSP considerably better at helping workers achieve a secure retirement than most private sector 401(k)s or IRAs.

As an employer, professionals recommend taking four basic actions necessary to have a tax-advantaged TSP:

• Adopt a proven plan.
• Arrange a trust fund for the plan’s assets.
• Develop a recordkeeping system.
• Provide plan information to participants.

Final Thoughts

The Thrift plan is a low-cost way to invest for retirement. Its tax deferral means no payment taxes on your income and growth until taking distributions. Starting a retirement savings plan as early as possible is key to success. Selecting an allocation of TSP funds is also very important. Matching investment objectives to financial goals is critical to helping achieve them. An informed decision increases the likelihood that it will align the two. The more retirement planning-related materials you have access to, the more educated your decisions can be.

The Thrift Plan professionals help clients experience a change in behavior that allows for a stress-free retirement with high hopes. In addition, we make it easier to manage your savings for retirement through your employer. Our expert team can help you develop an actionable plan for how much to defer into your TSP and advise whether the traditional, Roth, or a mix of the two options is suitable for your goals. We are here to provide you with a perspective on the long-term and short-term benefits of participating in a TSP.