”401k” Federal Savings Plan Guide
The “401k” Federal Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services. As of December 31 2015, there were approximately 4.8 million participants, and nearly $458 billion in assets under management.
The”401k” Federal Savings Plan is one of three components of the Federal Employees Retirement System (FERS; the others being the FERS annuity and Social Security) and is designed to closely resemble the dynamics of both private sector 401(k) and Roth 401k (new Roth Plan implemented in May 2012) plans. It is also open to employees covered under the older Civil Service Retirement System (CSRS).
The “401k” Federal Savings Plan is administered by the Federal Retirement Thrift Investment Board.
FERS employees are eligible to join ”401k” Federal Savings Plan immediately upon starting work and may join at any time thereafter. Prior to June 22, 2009, new employees had to wait at least one year before receiving matching contributions (including Agency Automatic Contributions); after this date employees were eligible for automatic contributions from day one of employment, and are immediately eligible for matching contributions once the employee begins contributing to the “401k” Federal Savings Plan
CSRS employees and members of the uniformed services may join at any time.
Contributing and Vesting
All FERS and CSRS employees and members of the uniformed services may contribute up to the Internal Revenue Code limitation, which is $18,000 for 2017. The contribution for FERS and CSRS may be either a specific dollar amount per paycheck or a percentage of income (but the percentage must be a whole percentage; fractional percentages are not allowed), uniformed service members elect a percentage of pay only. (Prior to 2006 the contribution was limited to a specified whole percentage of pay.) Once the contribution is selected it automatically renews each year at the same amount or percentage until the participant elects otherwise. As of September 2015, new employees will be enrolled in the”401k” Federal Savings Plan with a 3% deduction from their gross pay being deposited into the age-appropriate Lifecycle Fund unless they make another choice.
In addition, participants age 50 or older under FERS and CSRS, or uniformed services may also make “catch-up” contributions up to the Code limitation, which is $6,000 for 2017. The catch-up contributions are tax-deferred and allow age eligible participants to defer up to $24,000 (for 2017) in their “401k” Federal Savings Plan. However, unlike the regular “401k” Federal Savings Plan contribution, this election does not automatically renew each year; the employee must specifically make a new election each year.
Uniformed service members are permitted to make contributions from both basic pay as well as from incentive, special, or bonus pay, but are subject to the regular contribution limits. Members of the uniformed services who deploy to designated combat zones are subject to the combat zone tax exclusion, which allows tax-exempt income earned. Contributions to the”401k” Federal Savings Plan by uniformed service members in a combat zone are contributed to the “401k” Federal Savings Plan as tax-exempt, and accrue tax-deferred earnings. Tax-exempt contributions are not subject to the IRC elective deferral limit, but are combined with tax-deferred contributions made and are subject to the IRC section 415(c) annual additions limit of $54,000 (as of 2017).
Participants who are both civilian federal employees and members of the uniformed services will have two separate “401k” Federal Savings Plan accounts if they elect to contribute while in civilian and/or uniformed service status, however the total tax-deferred contributions in both may not exceed the IRC elective deferral or catch-up limits. In addition, the total tax-deferred, tax-exempt, and agency contributions made to both “401k” Federal Savings Plan accounts are subject to the IRC Section 415(c) limitation of $54,000 (as of 2017). Catch-up contributions made (to one or both “401k” Federal Savings Plan accounts) are in addition to the elective deferral and 415(c) limits. Participants may also rollover existing 401(k) or Individual Retirement Accounts (Traditional IRAs only) into the “401k” Federal Savings Plan.
Employees under CSRS are not eligible for matching contributions.
FERS employees receive an “Agency Automatic Contribution” of 1% of base pay (this includes any locality pay adjustment and/or shift differential but does not include overtime or bonus pay) from the first day of employment, even if the employee does not contribute to the “401k” Federal Savings Plan.
Additional matching contributions are made dollar-per-dollar for up to 3% of base pay, then at fifty-cents-per-dollar for each additional percent up to 5%. Thus,
An employee contributing 3% of base pay would receive an additional 3% matching contribution (dollar-per-dollar matching contribution on the whole 3%) plus an additional 1% agency automatic contribution. Total agency contribution is 4%.
An employee contributing 4% of base pay would receive an additional 3.5% matching (dollar-per-dollar matching contribution on the first 3%, plus .5% for the fourth percent contribution) plus an additional 1% agency automatic contribution. Total agency contribution is 4.5%.
An employee contributing 5% of their base pay would receive an additional 4% (dollar-per-dollar matching contribution on the first 3%, plus .5% for each of the fourth and fifth percent contributions (making 1% total)) plus an additional 1% agency automatic contribution. Total agency contribution is 5%.
Contributions in excess of five percent are not matched, nor are “catch-up” contributions matched.
Uniformed service members are eligible for matching contributions only if the secretary of the specific service designates “critical specialties” eligible for such. As of 2010, no specific specialty has been designated as such. However, in 2006, Congress enacted legislation to sponsor a pilot program to offer matching contributions to new active duty enlistees. This program was administered by the Department of the Army from April 1, 2006 through December 31, 2008. Enlistees who qualified for “401k” Federal Savings Plan matching during this period (provided completion and returned paperwork was processed as of initial enlistment) receive a dollar for dollar matching contribution on the first three percent of their contributions from basic pay; and fifty cents on the dollar for the next two percent contributed for the duration of their first term of enlistment.
FERS employees must complete three years of Federal civilian service to be fully vested in agency automatic contributions and any earnings thereon. 
The “401k” Federal Savings Plan offers investors 10 funds in which to invest. Five are individual funds (one dealing with government bonds and the other four tracking specific market indices) while the other five are “Lifecycle Funds” designed to professionally change the allocation mix of investments among the individual funds during various stages of the employee’s federal service. All “401k” Federal Savings Plan funds are trust funds that are regulated by the Office of the Comptroller of the Currency and not the Securities and Exchange Commission; thus, there is no ticker symbol to track actual performance (though with the individual funds except the G Fund, the comparable index is easily tracked).
Employees may choose from any or all of the individual or Lifecycle funds in which to invest (any allocation must be expressed as a whole percentage) and may change their allocation for future pay periods at any time (if the request is received before noon Eastern time it is usually effective as of the close of business that day; otherwise, it is effective the following business day). If no selection is made the default is 100 percent allocation into an age-appropriate Lifecycle (L) Fund (except for uniformed services whose default is the G Fund). As all funds except the G Fund have a potential risk of loss of principal, an employee is required to acknowledge this risk before investing into those funds.
Participants may also choose to change the allocation percentage of their existing fund balances (referred to as “Interfund Transfers”). Prior to May 2008 participants could change the allocation as often as possible (limited to one per day) among any and all funds; beginning in May 2008 participants are limited to two unrestricted transfers per calendar month, all subsequent transfers must be into the G Fund only.
G Fund – Government Securities fund. These are unique government securities not available to the general public and are backed by the full faith and credit of the US Government. The G Fund was the initial fund established by the “401k” Federal Savings Plan when it began operations on April 1, 1987. This is where we say is the safest of all funds but very little return.
F Fund – Fixed Income Index fund. Invested in BlackRock’s U.S. Debt Index Fund. Tracks the Barclays Capital Aggregate Bond Index. The F Fund was opened to Federal employees in January 1988 but was limited to only a portion of contributions; beginning January 1991 all restrictions on F Fund contributions were lifted.
C Fund – Common Stock Index fund. Invested in BlackRock’s Equity Index Fund. Replicates the total return version of the S&P 500 index. The C Fund also opened to employees in January 1988 and was subject to the same restrictions as the F Fund until January 1991. Can generate great returns, BUT very risky.
S Fund – Small Capitalization Stock Index fund. Invested in BlackRock’s Extended Market Index Fund, which tracks the Dow Jones U.S. Completion TSM index. The S Fund opened to employees in May 2001.
I Fund – International Stock Index fund. Invested in BlackRock’s EAFE Index Fund. The I Fund opened to employees in May 2001. Another very risky fund.
In 2005, the “401k” Federal Savings Plan introduced the Lifecycle Fund series. The purpose of the Lifecycle Funds are to allow for automatic reallocation of assets from more-risky stock funds (the C, I, and S Funds) into less-risky income funds (the F and G Funds) as an employee reaches retirement age, as an employee may lack the time, interest, and/or expertise to determine suitable investments at various life stages.
The current Lifecycle Funds established, along with the corresponding retirement date window, are as follows:
L2050 – Retirement date of 2045 and thereafter
L2040 – Retirement date between 2035 and 2044
L2030 – Retirement date between 2025 and 2034
L2020 – Retirement date between 2015 and 2024
L Income – Individuals currently receiving monthly payments
The L 2010 Fund was retired on December 31, 2010. Plan participants nearing retirement age can invest in the L Income fund: its allocations are identical to the L 2010 fund as of mid-2010.
“401k” Federal Savings Plan Withdrawals
There are two types of loans available (a general purpose loan and a loan for a primary residence); an employee can have only two loans active at any one time, one of each type.
The minimum loan amount is $1,000 and the maximum is $50,000, but the employee must have sufficient assets in the account to take out a loan. The minimum term is one year; the maximum term is five years for the general purpose loan and 15 years for the residence loan. There is a $50 processing fee per loan. If the employee or service member is married the spouse (even if separated) must consent to the loan.
Loans must be repaid via payroll deduction (though an employee may also make additional repayments outside this process) and the interest rate charged is the G Fund return rate at the time the application is processed. After repayment an employee must wait 60 days before applying for another loan of the same type. If the employee separates from federal service before the loan is paid, the employee must repay the loan within 90 days or it will be reported as taxable income.
The minimum withdrawal is $1,000 (or the account balance, if smaller). For married FERS employees and uniformed service members the spouse must consent to the withdrawal; for married CSRS employees the spouse need only be notified.
An employee over age 59½ may request an “age-based” withdrawal. The withdrawal is not subject to any penalties (other than income tax and loss of potential future earnings on the investment); however, the employee may not then request a post-employment partial withdrawal. An employee may make only one such withdrawal.
An employee may also request a “financial hardship” withdrawal, which is limited to one of four specific needs:
negative monthly cash flow,
medical expenses (including household improvements needed for medical care),
personal casualty losses, or
legal expenses for separation or divorce.
Financial hardship withdrawals carry a steep price. In addition to the permanent withdrawal of funds (the funds cannot be repaid to the “401k” Federal Savings Plan) and the permanent loss of potential future earnings on the investment:
The employee cannot contribute to “401k” Federal Savings Plan for the following six months and loses any matching contributions during this time (however, the employee will still receive automatic contributions); thus, the employee loses both the tax deferral advantages and the potential future earnings, after six months the contributions are not automatically renewed; the employee must submit paperwork to renew them, and the withdrawal is subject to both income tax and, if the employee is under age 59½, the early withdrawal penalty tax.
A financial hardship withdrawal can be made only once every six months.
Federal employees who leave for a non-Federal employer may usually “rollover” their “401k” Federal Savings Plan accounts into an IRA or a retirement account with the new employer or into a private IRA like an Annuity.
Separated and retired participants are not eligible for “401k” Federal Savings Plan loans.
Upon separation, any balances less than $200 (but at least $5) will be automatically cashed out in a single payment; amounts less than $5 are not automatically cashed out and are forfeited to the “401k” Federal Savings Plan, but the participant may later request payment. The participant then has 60 days to complete the rollover of the funds to a qualifying account to preserve their tax-deferred status. No other option is available under these circumstances. For participants having balances of $200 or more, upon separation the following options are available (spouses’ rights apply when the balance exceeds $3,500):
A participant may request a partial withdrawal provided that 1) the balance is at least $1,000 and 2) the participant did not make an in-service age-based withdrawal.
A participant may request a full withdrawal in a combination of any or all of the following options but before you do any, you should speak to a Chartered Federal Employee Benefits Consultant to see what’s best for you.
A Single Payment,
Monthly payments based on a dollar amount or request “401k” Federal Savings Plan compute lifetime payments, and/or
A Life Annuity (provided there is at least $3,500 available in the account to purchase the annuity), based on one of several different features depending on what is chosen (single life or joint, survivor benefit, cash refund or “10-year certain”).
A participant who requests a single and/or certain monthly payments may rollover their payment(s) into a qualifying retirement account.
A participant who is receiving monthly payments may request a change in the dollar amount received each year, or switch from receiving payments based on “401k” Federal Savings Plan life expectancy computation to receiving a dollar amount each month. The remaining “401k” Federal Savings Plan account continues to accrue earnings and participants may make interfund transfer or contribution allocation changes to the balance. “401k” Federal Savings Plan will also continue to accept rollovers from IRAs or qualified plans while a participant is receiving monthly payments. At any time the participant may contact “401k” Federal Savings Plan to request a final single payment of the remaining balance.
A participant may leave their funds in the “401k” Federal Savings Plan, but must withdraw the entire balance (or receive monthly payments) by April 1 of the year following the year the member turns age 70½ (or, if the member separated from Federal service after age 70½, the year following separation).
If a withdrawal is not made by this time, the participant will be paid an annuity as required by law.
If the participant does not provide information for “401k” Federal Savings Plan to purchase the annuity for either themselves or their spouse, the account will be declared abandoned. The participant may later reclaim the account by choosing a withdrawal option, but during abandonment the participant will not receive earnings on the balance.
So, What do we provide to help you?
- Retiring comfortably with no money worries.
- Estimating your “401k” Federal Savings Plan at retirement.
- Avoiding the pitfalls of poor retirement planning.
- Maximizing growth of your “401k” Federal Savings Plan account balances.
- Combining federal benefits with Medicare and Social Security.