By W. Lee Radcliffe
The Thrift Savings Plan turned 25 this week. The TSP opened for business on April 1, 1987, with the creation of the first 600,000 personal accounts for those switching from the Civil Service Retirement System (CSRS) to the new Federal Employee Retirement System (FERS).
The establishment of the TSP came as part of the FERS Act, signed by President Reagan on June 6, 1986. The goal was to transition new and recently hired federal government employees from a single “defined benefit system” or single pension, to one that mixed a reduced pension with Social Security and a new “defined contribution” system, which became the Thrift Savings Plan. The government would provide matching funds for up to 5% of money that individuals saved and invested from their salaries in the TSP.
Due to delays in appointing board members and the executive director to oversee the creation and administration of the new TSP, the opening of the first TSP accounts was delayed from January 1, 1987 to April 1st of that year. The G Fund was the first fund available to new TSP investors, and the F and C Funds began accepting contributions in January 1988.
So how have these original funds done since then? All in all, pretty darn well, although the C Fund especially has experienced a lot of ups and downs since then.
Take, for example, an investor who started contributing to the TSP in early 1988 as a GS-07 Step 1, making just over $18,700 a year back then. With promotions and increases in salary, this individual gradually worked her way up to a GS-12, making approximately $60,000 by April 2012. This represents a 5% increase in wages a year, on average.
If this individual invested 5% of her salary each year into the G Fund (the contributions in these examples were invested monthly instead of biweekly for ease of calculation), and the government provided another 5% in matching funds, her TSP account would have grown from $0 in January 1988, to approximately $140,100 at the end of March 2012. She would have experienced no drops in her balance during that time.
Had she invested entirely in the F Fund during this time, she would have grown her investments to approximately $172,300 by April 2012. However, she would have experienced a few declines in 2004, in late 2008, and again in late 2010, but only by a few thousand dollars. She would also face significant interest rate risk by early 2012, as rising interest rates in the future could negatively impact the value of the bonds held in the F Fund.
Interestingly, had she invested in the C Fund – the U.S. stock market index fund – she would have grown her investments to over $197,800 during this time, despite the wild gyrations of the stock market especially in the 2000s. For example, her fund balance would have dropped from over $108,500 in mid-2000 to just over $65,000 in September 2002. It would not have recovered for another year, even with steady investments each month. After reaching $166,200 in October 2007, her fund balance again plummeted to just over $85,700 in early 2009. It later recovered and grew to new highs again with additional investments, but not everyone could have stomached these drastic ups and downs in their fund balances.
An alternative would have been to diversify into a moderate portfolio, with 60% going into the C Fund and 40% into one of the bond funds (the G or F Fund). For example, with 60% of her contributions going to the C Fund and 40% to the F Fund, she would have just over $187,600 by the end of March 2012, slightly less than the C Fund but more than the F Fund alone. And she would have avoided some of the drastic declines in her fund balances. Her $85,000 in mid-2000 would have dropped briefly to just under $71,000 in September 2002, and then would have more than recovered to $85,000 again in October 2003, for example. While still a decline of around 16%, that decline was nowhere near the 40% decline in the C Fund alone.
Similarly, from a high of $143,700 in October 2007, this moderate portfolio would have dropped to $101,000 by February 2009 before recovering with steady contributions a year later. While this was a significant drop of around 30%, this was less than the drastic decline of almost 50% in the C Fund during that same time. And the S and I Funds, which were introduced in 2001, suffered even steeper declines during these significant market gyrations.
While the TSP is still quite young at 25, investors have experienced many ups and downs since it became operational in April 1987. The general trend since its inception has been up, but recent experience teaches us that sudden and sometimes sustained drops do happen from time to time. The prudent investor should thus understand his or her own risk tolerances and invest in the TSP accordingly.
For further details on the data used in this article, see TSP Fund Returns, 1988-2012.
W. Lee Radcliffe runs the Web site TSPstrategies.com and is the author of TSP Investing Strategies: Building Wealth While Working for Uncle Sam.