Federal TSP (Thrift Savings Plan) Earnings & Losses

Summary:  Unlike all other retirement plans, under the Federal Thrift Savings Plan (TSP), losses since the date of the valuation and division are always paid by the Employee.  And actual earnings are not credited to the Alternate Payee. This makes it difficult to plan and administer a court order which divides TSP assets.  (Before we started having losses in 2009-2010, this was not a problem, but it is now in 2014.)

Unlike Other Retirement Plans, the TSP Does Not Track Losses and Earnings

The Federal TSP (Thrift Savings Plan) is somewhat like a traditional 401(k) plan.  It is a type of tax-deferred savings and retirement plan.

However, when dividing a TSP with a court order to divide marital assets in Colorado, the TSP has 2 unique characteristics:

       1.   The TSP does not allocate losses to both parties, as of the date of the valuation and division (such as the date of the Decree); and

       2.   The TSP does not track actual earnings, but does permit the Order to specify earnings to be credited to the Alternate Payee (non owner spouse).

These two unusual characteristics make it difficult to properly divide a TSP in a Colorado divorce.

Colorado law provides that the date of the Decree (unless the parties agree to something different) is the date of the valuation and division of a retirement asset. The link in the previous sentence provides some of the relevant law.

This means that with essentially all retirement plans (other than TSP) losses and earnings are allocated to the Employee's account and to the Alternate Payee's account just the same as if the retirement plan was actually divided on the date of the valuation and division.

Example of Traditional Allocation of Earnings and Losses For Plans Which Are Not TSP

As an example of how essentially all retirement plans track earnings and losses, consider this example:

      -   The Employee/Participant's account balance on the March 31 date of valuation and division is $10,000.

     -   The Order (like a QDRO) which divides the plan 50-50 is done 6 months later on August 31.

     -   Between the March 31 date of valuation/division and the actual division on August 31 6 months later, the plan loses $800.

Colorado law requires that, unless otherwise agreed, the Alternate Payee (non owner Spouse) will get $5,000 less $400, which is $4,500.  In other words, the losses are split just as if the actual division was done on the March 31 date of the valuation and division.  Both former spouses are treated just as if the account was split on the March 31 date of the valuation and division.

Same Example, But With a Federal TSP Plan

Using the same March 31 and August 31 dates, and the total $800 loss, the TSP will split as follows:

     -   Alternate Payee (non owner Spouse) will get $5,000 on August 31.

     -   Employee/Participant (owner Spouse) will end up with $4,200 on August 31.

     -   This means that the Employee/Participant (owner Spouse) takes all of the $800 of losses between the March 31 date of valuation/division and the actual division done on August 31.

     -   This unintended result is because the TSP does not track or allocate losses between the March 31 and August 31 dates.

     -   Instead, TSP gives the full 50% ($5,000) to the Alternate Payee under the Order, no matter how much the losses are or when the actual division is completed.

The Same Applies to TSP earnings

The TSP will not consider earnings, but you can specify a % of earnings or a per diem dollar amount of earnings in the order.  Or go with the G fund earnings, whatever those earnings are.

Like losses, the TSP does not track actual earnings, but instead will credit the Alternate Payee (non owner spouse) with whatever earnings are specified in the Order.  (And if the TSP account was losing money, any specified earnings will be taken from the Employee/Participant's account even though it lost money overall.)

In early 2010,  G Fund earnings were running about 1.61% on an annual basis.  But some of the other TSP funds were losing money, at about 5% or so.

What Can You Do About the Unusual TSP Characteristics?

In years past (prior to 2009-2010), plans like a 401(k) or TSP did not lose money. So, this was not a problem.

But, when the stock market is losing money as it is in 2009-2010, here are some suggestions:

     -   Do the TSP as soon as possible, preferably get the proposed Order into the Colorado court before the court signs off on your divorce decree.

     -   Allow some consideration for losses, if your TSP account is losing some money.  So, if it lost 5% in the past 7 months, maybe give 1 to 2% less to the Alternate Payee to allow for some continued losses.

     -   And/or do not consider either earnings or losses, just get the split done ASAP.

     -   If you cannot agree and you end up in court, the judge will not spend any time reviewing account statements, etc., but instead will likely just go with a 50-50 split to be done ASAP, without consideration for losses or earnings. (This may mean that all losses will be allocated to the Employee/Participant.)  However, if the court case was properly argued, the Judge may order a reduction in the amount that goes to the Alternate Payee, to account for losses.)