Changing Allocations for TSP Funds

By on March 27, 2014 in Current Events with 18 Comments

The Thrift Savings Plan (TSP) has issued a news update that indicates there are quarterly changes to the allocations within the lifecycle funds. The TSP wrote, “As a result of changes in long-term capital market assumptions and a review of the Lifecycle fund asset allocations, the TSP has revised the target asset allocations of the Lifecycle funds.”

Many readers are cynical and possibly opposed to change–especially when it may not be clear if the change is beneficial to them. We received several emails from readers that had similar questions and an underlying concern that the changes announced by the TSP may not be beneficial. Here is a quote from one reader: “Why did they move so much from the F fund to the G fund? What ‘assumptions’ are they referring to?”

Here is a summary and an explanation.

In checking on the new allocations for the lifecycle funds (L funds), the allocations are not dramatically different. The TSP does change allocations, or at least review them, each quarter for the L funds. The income fund usually remains the same as it is the most conservative of the L funds and designed for those who are retired or close to retirement.

The investment strategy of the L fund is not complicated, at least for the TSP investor. According to the TSP, “The L Funds’ strategy is to invest in an appropriate mix of the G, F, C, S, and I Funds for a particular time horizon, or target retirement date. The investment mix of each L Fund becomes more conservative as its target date approaches.” An investor will be moved into the more appropriate lifecycle fund automatically as a federal employee gets closer to retirement.

In practice, greater risk for a fund means a higher investment in the underlying stock funds (the C, S and I funds). Investing more in stock funds means that there is a potential for a greater return than investing in bonds. There is also generally a greater chance that the stock funds will lose money, at least in the short term. You can check out the average annual returns of each of the underlying funds at TSPDataCenter.com to see how this has played out over time. Generally, investing in stocks provides a greater return than investing in bonds but there are years when the stock market will go down.

This strategy is evident in the allocation of funds. The L2050 fund has much more invested in stocks than in bonds. The more conservative funds have considerably more invested in bonds and less in stocks than the more aggressive funds.

Here are the changes being made to the L fund allocations:

 L2050 Fund

Current Allocation:                  April 2014 Allocation:

  • G Fund: 10.8%           G Fund: 10.68%
  • F Fund: 2.70%           F Fund: 3.07%
  • C Fund: 42.60%        C Fund: 42.50%
  • S Fund: 18.30%         S Fund: 18.25%
  • I Fund: 25.60%          I Fund: 25.50%

L2040 Fund

Current Allocation:                  April 2014 Allocation:

  • G Fund: 18.8%           G Fund: 18.78%
  • F Fund: 4.70%           F Fund: 4.97%
  • C Fund: 38.60%        C Fund: 38.50%
  • S Fund: 16.30%         S Fund: 16.25%
  • I Fund: 21.60%          I Fund: 21.50%

L2030 Fund

Current Allocation:                  April 2014 Allocation:

  • G Fund: 28.48%        G Fund: 28.53%
  • F Fund: 5.02%           F Fund: 5.22%
  • C Fund: 34.60%        C Fund: 34.50%
  • S Fund: 12.60%         S Fund: 12.50%
  • I Fund: 19.30%          I Fund: 19.25%

L2020 Fund

Current Allocation:                  April 2014 Allocation:

  • G Fund: 42.98%        G Fund: 43.20%
  • F Fund: 4.77%            F Fund: 4.93%
  • C Fund: 28.05%        C Fund: 27.87%
  • S Fund: 8.60%           S Fund: 8.50%
  • I Fund: 15.60%           I Fund: 15.50%

Income Fund

Allocation Does Not Change:

  • G Fund: 74%
  • F Fund: 6%
  • C Fund: 12%
  • S Fund: 3%
  • I Fund: 5%

In general, one would not expect to see dramatic changes in how the funds are allocated from one quarter to another. For each of these funds, with the exception of the L Income fund, investors are three months closer to retirement so there is likely to be more invested in bonds and less in stocks for each of the funds. And that is the case for each of the funds as you can see from the tables above.

Two of the more significant changes are in the more aggressive L funds. For the L2050 and L2040 funds, the allocation to the G fund is being decreased in April while the allocation to the F fund is being increased. In effect, the reductions in stock investments and the reduction in the G fund are going into the F fund.

For the L 2020 and L 2030 funds, the allocation for the G and F funds are being increased while the stock funds allocations are being decreased. There has also been a change over the past year in moving money between the G and F funds for reasons explained below.

Why the Changes in the Allocations?

Changes are routinely made to put more money into bonds (the F and G funds) and less into stocks when the quarterly allocations are made since investors are getting closer to retirement. The changes in the allocations are usually small as one would expect as the investments are intended to be made over the life of a person’s career in government. Also, as markets change, the TSP routinely balances the allocations to provide the desired diversification in a person’s investments that may have gotten altered during periods when the stock market has been going up or down significantly. (You can check out changes in L fund allocations over time using the charts on TSP.gov.)

There will also be changes due to “long-term capital market assumptions.” We do not know what these assumptions are that go into the L fund allocations but the changes that are made provide some insight.

For example, in January 2013, the L 2050 fund had 8.33% of funds invested in the F fund. 4.17% was  invested in the G fund. In January 2014, the L 2050 fund had changed significantly. 10.80% was invested in the G fund. Only 2.70% was in the F fund. In looking at these figures, the implication is that the allocations were changed based on a more negative prognosis for investments in the F fund. (The F fund was the only fund that had a negative return in 2013.)

We have been in a period of very low interest rates for some time, due in large part to actions by the Federal Reserve to buy government bonds and to keep interest rates low. This has been an incentive to invest in stocks and stock prices have gone up significantly.

The Federal Reserve is now cutting back on bond purchases and interest rates may start to go up again. If that happens, the value of F fund shares are likely to decline as there is a correlation between interest rates and bond prices. If interest rates go up, the value of shares in the F fund are likely to go down.

The G fund, on the other hand, is less volatile. The bonds in the G fund are short-term bonds and the rate changes each month with bonds that are just being issued specifically for the TSP. In some investing environments, an investor is likely to have a better return in the F fund because interest rates paid to investors may be higher and the value of the fund will go up if interest rates drop.

Summary

In the current environment, a reasonable assumption would be that the G fund is a safer investment as interest rates may go up. Investing in the G fund may be a better investment approach, at least for the most conservative lifecycle funds. That appears to be what has happened in recent months to the lifecycle investment allocations.

For those who do not take an interest in the changes in the investment climate, the lifecycle funds are designed to automatically provide diversification without any action being taken by an investor. It is very likely that most lifecycle fund investors do not pay much attention to the allocation among the different funds or the changes in these allocations.

For these investors, the lifecycle funds are probably the best approach to funding your future retirement. Markets will go up and down over time. Your allocations in the appropriate lifecycle fund will change automatically and are likely to provide these investors with a better return over time than those investors who “set it and forget it” after they have made their initial allocation choices.

© 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 on federal human resources.

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