New Automatic Allocation for the TSP Coming Next Fall

By on December 16, 2014 in Current Events with 0 Comments

Congress recently passed the Smart Savings Act, legislation which changes the default TSP allocations for newly hired federal employees from the G fund to an age-appropriate Lifecycle fund.

The purpose of the legislation is to give federal employees saving for retirement better returns than they would get by just leaving their money in the ultra conservative G fund and instead automatically enrolling them in one of the Lifecycle funds that is closest to their projected retirement date. The Lifecycle funds follow the asset allocation theory – they start off investing in more aggressive funds when the employee is at a younger age and gradually move into more conservative investments as the employee nears retirement.

Just how much of an impact could skipping the G fund and investing in more aggressive funds have on an employee’s returns? From the beginning of auto-enrollment in August 2010 until September 2013, the “G Fund’s” returns totaled 6.33%, compared to a 47.4% return for the L 2040 fund, which is designed for employees to plan to retire around 25 years from now. For the last 12 months, the G fund has only returned 2.32% whereas the C fund (which tracks the S&P 500) has returned nearly 17% and the L 2040 has returned almost 9% in the same period of time.

The legislation does not apply to current federal workers, only new hires. And Federal employees will, of course, still have the ability to pick their own allocations when investing their money in the TSP.

The president has not yet signed the legislation into law yet, however, it is listed on the “pending legislation” section of the White House website, so it is currently expected that the bill will be signed into law in the next few days.

The legislation states that the executive director of the TSP board shall develop and issue guidance to implement the new law no later than 9 months after it has been signed into law. The TSP board will be setting up and testing new technology to comply with the new law between now and next fall and it will go into effect for new hires after that time.

The Smart Savings Act was introduced by Senators Elizabeth Warren (D-MA) and Rob Portman (R-OH).

“I’m glad Congress has passed this bipartisan legislation, which will help many federal employees and their families save for retirement,” said Senator Warren. “This bill is a straightforward way to improve the retirement security of federal workers at no additional cost to the government.”

 

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Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce. Ian also has a background in web development and does the technical work for the FedSmith.com web site and its sibling sites.

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