By Stephen Barr

Wednesday, January 23, 2008; D04

The federal retirement savings board's first meeting of 2008 began yesterday morning on an ominous note, with reports of a roiling stock market and an emergency interest rate cut by the Federal Reserve.

Aware that the dramatic market swing could increase telephone calls to the Thrift Savings Plan and traffic at the plan's Web site by government employees, officials at the TSP said they were ready for any surge in calls or sell orders.

The TSP is one of the world's largest 401(k)-type savings plans, with $231.6 billion in assets and nearly 3.9 million participants. Calls and transactions by even a small percentage of the plan's members can create huge workloads or big-dollar trades.

"Be sure assets are safe. That systems are functioning," Andrew M. Saul, chairman of the Federal Retirement Thrift Investment Board, told TSP senior staff.

The board found some comfort in the plan's performance in 2007.

The TSP continued to reduce administrative and overhead costs, so participants were charged 10 cents for every $1,000 in their accounts last year. That's substantially lower than what most mutual funds and other retirement plans cost, and 50 cents per $1,000 less than participants were charged in 2004.

The lower cost was partly made possible by a mix-up years ago in federal retirement rules.

In 1983, Congress decided to place new government hires in the Social Security system, and by 1986 had set up the Federal Employees Retirement System and effectively closed the Civil Service Retirement System to new members. In 1984, Congress changed its mind about some of the rules for who would move into Social Security, but many employees ended up in the wrong retirement program. In 2000, Congress authorized the Office of Personnel Management to sort out the mistakes.

As a result, the TSP last year picked up $31.5 million in forfeitures caused by the retirement errors, according to data presented to the board. Most of the money came from matching contributions to the TSP from agencies that had placed employees in the wrong retirement system.

Under the tax code, agencies reclaim the money from a retirement fund unless such mistakes are discovered within a year.

TSP used the forfeitures to cover expenses, and also collected about $12.8 million in fees for processing loans on behalf of participants. While the plan cost $75.7 million to operate in 2007, the charge to participants was about $31.4 million because of the two offsets.

Officials said the forfeitures caused by the decades-old mix-ups probably would not be as big in the future. They also noted that the plan's costs will increase slightly next year as the TSP upgrades its computer operations, including data-storage facilities and backup systems.

A new set of funds, known as lifecycle funds, seemed to take root last year, TSP officials said. The funds, which permit participants to invest based on when they plan to retire or begin withdrawing savings, have attracted almost $24 billion in contributions and investments since they were started in August 2005.

Three of the lifecycle funds, known as the 2020, the 2030 and the 2040, outperformed all other TSP funds except for the international stock fund.

But the international fund also ended the year with the highest trading costs of any TSP fund, $16.5 million, causing concern at the thrift board.

Federal employees placed buy and sell orders for $26.7 billion last year -- an amount equal to the fund's assets in most months. "We cannot have an I Fund with 100 percent turnover," said Gregory T. Long, the board's executive director.

Two months ago, TSP officials said their research showed that relatively few federal employees were driving up trading costs and transaction fees in the international fund by jumping in and out in hopes of increasing their returns.

Long said the staff is moving forward with a proposal to limit plan participants to two trades a month in the TSP, plus an additional transfer of money to a government securities fund for those who think they made mistakes in the stock or bond markets.

The TSP is drafting the proposal to show an employee advisory council in the next week or two, before publication as a rule, Long said. The trading curb probably will not be in place until April because computer systems must be reprogrammed.