Oddly, the Educated Pay Higher Fees

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It’s smart to invest retirement savings in mutual funds that charge very low fees for one simple reason: the worker keeps more of his money and hands over less to Wall Street.

But in a study of people in their 50s and 60s who have retired or otherwise left federal employment, the people with the most education and the best scores on a standardized test were more likely to make what seems to be the wrong decision. Rather than keep their retirement funds in the government’s Thrift Savings Plan (TSP), which has extremely low fees, they transferred the money to much higher-fee IRAs operated by financial companies.

The $500 billion TSP – the world’s largest defined contribution retirement plan – is inexpensive in large part because it invests only in index mutual funds, which automatically track a variety of stock and bond market indexes and avoid the need to pay money managers to pick the investments. The annual fees for TSP’s index funds – known as expense ratios – are under 0.04 percent of the investor’s assets.

But over a 10-year period, about one fourth of the former federal employees rolled over the money saved during their careers into IRAs that typically had much higher expense ratios: 0.57 percent. On top of that, IRAs often charge additional fees for investment advice, pushing the potential total annual fees to well in excess of 1.5 percent. It’s possible that investing in an IRA could generate enough returns to make the extra fees worthwhile, but research has shown this is not the norm.

What explains the rollover decision? More educated people tend to have larger retirement account balances, raising the possibility that they were either seeking out financial advice or were targeted by advisors’ sales pitches. However, even among people with similar balances, those with more education were still more likely to roll over to IRAs.

It’s possible that they “perceive that they know what they’re doing” and want to take control of their investments “even when higher fees result,” the researchers said.

Although transferring money from a low-fee employer plan to an IRA is generally ill-advised, the more-educated former employees did make up for a small part of the higher fees by choosing institutions with lower fees than did their less-educated former coworkers who also moved their money over to IRAs.

The findings in this paper are an interesting counterintuitive take on the relationship between an individual’s cognitive ability and financial decisions.

To read the study, authored by John Beshears, James Choi, David Laibson, Brigitte Madrian, William Skimmyhorn, and Stephen Zeldes, see “Education, Cognitive Performance, and Investment Fees.”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

Ken Pidcock

Observed by Alicia Munnell, I believe: Nobody seems to know much about finance, but everybody seems to “know” that they should roll over their work plan into an IRA. I’ve wondered if I should feel insulted that nobody’s tried to convince me. Is it my address?


As a former fed, I’d like to point out another reason why people may opt to pull their retirement money out of the TSP. As a Federal worker, you learn very quickly you can’t trust Congress when it comes to any retirement promises.

The TSP is a tempting pot of money for the Hill. Whenever members of Congress fail to fund the government, they tap TSP funds to keep it running. Sure, it gets put back. Eventually. But what happens if the day comes that they don’t? The day they declare there’s a crisis demanding “sacrifice” from the Federal workers?

At one time, workers under the FERS system got a 5% match. That was a big selling point. I was one of many people who made the decision to leave the older CSRS (“no match”) plan and switch into FERS. But guess what? Over the years that 5% match got reduced–but you couldn’t go back to CSRS.

Promises made today can (and have been) broken tomorrow. I’m sure that reality plays a major role in the decision these retirees make.

    West Garrett

    I highly doubt that the primary reason for this behavior is a distrust of Congress and an irrational fear that Congress will essentially “steal” from their TSP. I imagine there are a few people that have this mentality, but federal employees likely have more trust in government than the average person. Some of the other comments on this page, such as the restrictions on withdrawals, are more likely to be responsible for this behavior.

Bob R

Perhaps they just want to roll over their Traditional TSP into a Roth account, which you can’t do within the TSP system, bit-by-bit or all-at-once. Plus, the impossibility of making three or more changes to holdings in a calendar month can quickly be restrictive. Vanguard and Fidelity both offer low-or-no-fee ETFs that cost less than the TSP’s mutual funds.


A reason I’d like to highlight is that post-retirement planning options are very limited within the TSP, even with recently passed changes that increase withdrawal options. For instance, a Roth conversion strategy (slowly converting Traditional contributions to a Roth account) is not possible within the TSP. You can only do that in IRAs. To execute a conversion strategy you have to transfer some or all of your Traditional TSP into a Traditional IRA, then convert the Traditional IRA money into a Roth IRA, obviously paying taxes along the way. Also, until this year’s tax law changes, TSP participants over the age of 59.5 had very few, very inflexible withdrawal options. I expect that the recent TSP withdrawal option changes will cause more participants to leave their balances in their accounts for longer periods of time after retirement or separation from federal service.


I agree with the comments above on Roth conversions, withdrawals etc. I do want to say that the TSP is great and G fund is unique. However-this study makes a conclusion based on assumption rather than data. They assume the fees on the rollover IRA funds are the average of the mutual fund companies. So, while I agree with the premise of questioning the IRA rollovers based on TSP low fees, the study authors do not actually know what folks (like me) did when they rolled over their IRA. I rolled my TSP into a major brokerage with low fee index funds and ETFs. I have more choice, more control, more flexibility and more convenience with slightly higher fees, having combined with TSP with a 401(k) from a private employer. I also don’t get charged advisory fees at the brokerage. In short, if you are going to make conclusions in a study, use real data.


The authors of the study do great work. But they simply don’t know what people are rolling into. It could be low cost Vanguard ETFs. As previous posts have pointed out, the TSP is pretty inflexible – no Roth, limited drawdown options, and also limited investment options that may be adequate for most, but not for the wealthy.


I believe this article is based on some old information, namely that the TSP has the lowest cost. There are now three fund families that have lower cost than the TSP, so rolling the TSP into a fund in those families will actually save money.

In addition, roth funds kept in a 401k (TSP) are required to have RMDs, so just by rolling those funds out you eliminate the RMD mandate.

Two very good reasons why I will roll the majority of mine out when the time comes.


@Tony- The TSP HAS a roth, so not sure where that misinformation came from.


Note that the comments are based on a study from September 2018, 16 months ago and before the recent TSP changes.

Eric Thompson

Never found anything matching TSP fees. If they are like unicorns then the authors are totally correct. The for-profit funds employ slick salesmen and do well.


I rolled my TSP into a Schwab IRA and invested in a mix of Vanguard ETFs with the same fees as the TSP.This study just ASSUMES that people rolled their TSP into an IRA with high fees.

The main reason I rolled out of the TSP is that they require a NOTARIZED form every time you make a withdrawal, if you are married.

I can make a withdrawal from the Schwab IRA with a few clicks on my keyboard.

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