TSP v Conventional Mutual Funds

Q. I'm looking for an alternative retirement savings opportunity over the TSP for federal employees. I heard some information on the Equity Index Fund (EIF) on the radio and was interested to know more.

Then I read your article on Google and now I'm confused. I save approx $300 per month and of course I'm looking for the best investment. The host of the radio show wants to schedule a meeting with my wife and I, but now after reading your piece, I'm lost.

A. Is your TSP pre-tax dollars? If so, it would be hard to find another vehicle
that could match it.

If it is not, then you have many alternatives. I do not feel an EIA should
be one of them.

If you are trying to grow your money (and aren't in the highest tax bracket)
then a mutual fund would make the most sense. You could use a no-load fund
like the Vanguard S&P 500 Index fund and there wouldn't be any fees or
commissions to add money or make changes. This would give you a great deal
of control. You would also be able to participate in all of the growth of
the stock market.

An Equity Indexed Annuity requires a very long time committment just so the
insurance company can earn back the commission it paid the agent. If you are
investing in it for growth, your are taking the risk of being in the market
but you don't get all the reward. EIAs limit your upside potential either
through caps or by limiting how much you can make in a month. You also lose
control. If you don't like it you can't get out without paying huge
penalties. Each $300 monthly contribution would have it's own surrender
schedule as well. If you needed at the money it would be very costly.

The only perceived advantage of the EIA is that your money wouldn't go down
in those years that the market does. But they require you to stay in them
for 10-15 years. There have been very few 10-15 year periods in which you
would have lost money in the S&P 500 index.

I hope this helps. Feel free to let me know if you have any other questions.

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