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Alert: Changes in Thrift Savings Plan

For Immediate Release
April 18, 1999

Media Contact: Will Casserly
wcasserly@ricedelman.com
(703) 251-0110

Edelman warns, "anyone who owns an S&P 500 fund should be alerted."

Fairfax, VA - A government plan to let workers diversify their retirement accounts in the Thrift Savings Plan could cause problems for the S&P 500 Stock Index, warns financial advisor Ric Edelman.

Beginning in October, federal employees will be able to invest their Thrift accounts in small-cap stocks and international stocks. Currently, these workers are limited to just three choices: a fixed account, a government bond fund, and a stock fund that mirrors the S&P 500 Stock Index. The two new additions are being heralded as giving federal workers the ability to further diversify their retirement assets. It also enables them to participate in sectors of the financial markets from which they currently are excluded.

But, warns Edelman, adding these choices to the plan could have an unintended impact. "Nearly 60% of all Thrift assets are in the plan's stock fund," Edelman observes. "If all these workers take quick advantage of the two new choices in October, there would be massive selling of the S&P 500 as these assets are shifted to small-cap and international stocks." This sudden outflow of money from the index could cause extreme volatility in the index's value, Edelman says, and "it's quite possible that millions of federal workers could find themselves all simultaneously selling low" in their effort to switch their investments within the Thrift plan.

Edelman, a nationally-known financial advisor and author of three personal finance best-sellers, including The Truth About Money, says this problem could affect a lot more investors than just federal employees. "Consumers around the country have invested more than $245 billion into S&P 500 index funds according to the Thrift Board, Pensions and Investments. If federal workers suddenly sell en masse, all S&P fund owners could be affected. If that occurs, it's quite possible that a panic could hit the S&P, as consumers nationwide sell to protect their investments."

Despite this gloomy scenario, which Edelman first revealed this week on his WMAL radio program, The Ric Edelman Show, Edelman says that this risk might not become a reality. The reason, he says, is that institutions have nearly $1 trillion invested in S&P index funds (Source: Thrift Board, Pensions and Investments), in addition to the amount invested in public mutual funds. "Taken as a whole, the Thrift plan's S&P allocation represents only about 4% of the total invested in the S&P," Edelman noted. "Furthermore, it's likely that many federal workers will not shift, or they will shift only a portion of their accounts. For these reasons, the overall impact on the S&P might be small."

Still, Edelman says it's best to be forewarned, for if his worst-case scenario proves true, federal workers and other S&P investors could lose substantial amounts of money. "If you are a federal worker and you intend to shift out of your S&P fund when the new choices become available in October, you should consider shifting out of that fund well before October" rather than waiting until then to act. If workers wait until the new fund options become available, he warns, they face the risk of selling while everyone else is selling. "Anytime lots of people sell the same thing at the same time, prices fall, and they fall dramatically."

While not predicting that this scenario will occur, Edelman says it is prudent for those who own S&P index funds to consider the possibility. "You must decide for yourself if this might happen, and you must take the action you think most appropriate." The biggest risk, he says, is for an investor to fail to consider the issue at all. "The most successful investors are those who make careful evaluations. Putting your head in the sand can cost you a lot of money."