Cycling Through Life With Your TSP

By on June 14, 2010 in Current Events with 0 Comments

Anyone investing in the Thrift Savings Plan in the past several years has noticed the dramatic fluctuations in the stock market. When you are planning for retirement, these fluctuations can have a dramatic influence on your future retirement lifestyle. As an investor, you want to maximize your future retirement income while minimizing the risk inherent in investing.

So how can you do that?

Numerous studies have demonstrated that trying to time the stock market often results in financial disaster for an investor. It is virtually impossible for professional investors to predict the short term movements of the stock market. Most of those investing in the Thrift Savings Plan are not professional investors and probably do not have the time or the inclination to spend the necessary hours researching stock market trends on a regular basis.

One answer provided by the TSP is the relatively new lifecycle funds. These types of funds are sometimes referred to as target date mutual funds.

Target date mutual funds are coming under scrutiny in Congress. Target date funds are similar to the lifecycle funds offered by the Thrift Savings Plan (TSP). The funds are becoming very popular for people investing for their future retirement. In another four years, analysts predict that about $1 trillion dollars will be invested in these funds—up from $269 billion today.

Congress is likely to become involved in looking at these funds at the urging of Senator Herb Kohl (D-WI). He became intrigued after a staff member noticed that various funds designed for people retiring in 2010 had markedly different results.

For example, in 2008, a disastrous year for the stock market, the S&P Target Date Fund dropped 17%. The AllianceBernstein 2010 Retirement Strategy fund went down 32% according to a report in Fortune magazine. Oppenheimer’s Transition 2010 target-date fund lost 41% in 2008.

And, according to the same report, the average fee for a target date fund is 1.16%.

What about the Thrift Savings Plan?

The TSP has target date funds available to investors. They are called lifecycle funds but the theory is the same. A person who selects a target date fund chooses a fund (such as the L2010 fund) that reflects the approximate year of your retirement. For those who are retiring sooner, the mix of TSP funds is more conservative than for those who are retiring later (such as the L2040 fund). The lifecycle funds own all five TSP core investments and they rebalance automatically.

So what happened in 2008 to the L2010 fund in the TSP?

It also went down as stocks took a dive. But it was not down 41% or even the 17% that the S&P Target Date Fund fell. In 2008, the L2010 fund was down 10.53%. Here is how the L2010 fund was structured in July 2008:

 

What About Costs?

While the average lifecycle fund has a fee of 1.16%, the TSP has an overall cost to investors of 0.03 percent. There are no extra fees for investing in the L funds.

One reason Congress is taking an interest in the target date funds used by investors in the private sector is that some funds charge double fees—one for the mutual funds and a second round of charges to manage the target date fund itself.

How it Works

The TSP automatically rebalances your investment to become more conservative as you get closer to retirement. For example, here is how the L2010 fund looked in January 2010:

 

You can see how the fund became more conservative by comparing this to the chart above as we moved closer to the investor’s retirement date of 2010.

The L2010 Fund will roll down into the L Income Fund in December 2010, and the L 2050 Fund will begin in January 2011.

No doubt, the lifecycle funds are not for all TSP investors, many of whom prefer to diversify their money in their own way. The lifecycle funds are becoming more popular among investors as we reported recently with 17% of FERS employees now investing in the funds. (See TSP Investors Withdrawing Money from G and F Funds) No doubt, some of those lifecycle fund investors are seeking refuge from making their own decisions on how to diversify their TSP investments.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.

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