The True Cost of the G Fund

By on March 8, 2016 in Retirement with 108 Comments

I’m going to outlay a few facts regarding the Thrift Savings Plan (and specifically the G Fund) for those reading (these will include links as citing of sources):

Based on these facts, we can deduce a few different things.

First off, the TSP has A LOT of investors. ~4.7 Million to be exact.

Second, nearly all TSP investors have at least a portion of their TSP portfolio in the G Fund, AND almost half have their ENTIRE account in G Fund. There’s a reason for that (to be discussed later.)

So, if so many people are investing in the G Fund, there’s no way they could be wrong, right? WRONG.

Who is the G Fund for?

Although I think the amount of people fully invested in the G Fund is most likely too many, the G Fund is probably the perfect place to invest for some.

The person the G Fund is suited for is those who have some combination of…

  • Not wanting ANY market risk (there still is risk and I’ll show you why)
  • Getting closer to retirement (the closer to retirement, the more important it is to protect your nest egg versus growing your nest egg)
  • Have built up enough money to go into retirement and live comfortably.

I also think the G Fund is great for diversification away from market risk. If you’re heavily invested in any one of the C, S, or I Funds, it may be in your best interest to do research on whether adding more safety to your portfolio would make for a better overall portfolio.

I’ve discussed this many times including this article regarding the 7 Steps to Choosing a TSP Investment Strategy.

Why do so many TSP participants invest in the G Fund?

There’s a couple different possible reasons.

The first logical reason is because the majority of federal employees who invest in the TSP are risk averse, meaning they’d rather have less risk, with a smaller chance for gains, than more risk and a greater chance for gains.

This idea could apply to everything in the life of these TSP participants, however, I don’t think this is the major reason for so many TSP participants being invested in the G Fund.

The main reason(s) I believe the G Fund is so DOMINANT is two-fold:

  1. Unless an allocation is chosen, TSP contributions were automatically invested in the G Fund up until recently, although now they are automatically invested in an L Fund. This flows into the next reason…
  2. TSP Investors are not given enough information and education regarding their 401-K type investment account known as the Thrift Savings Plan.

In my opinion, this is a BIG problem.

Granted, I understand that the federal government is generally overworked and understaffed. BUT, there are 4.7 MILLION PARTICIPANTS and I would estimate that only a small amount of those participants have a good understanding of what they’re investing in.

Is this the fault of the participant or the government?

Well, that’s a discussion for a different time, BUT I will say this is one of the reasons I started focusing much of my efforts on federal employees. EVERYBODY putting their hard earned dollars aside to save for the future deserves to understand what they’re investing in.

This is the reason I’ve made videos and articles like this one: The Biggest Federal Employee Retirement Mistake

So, what’s wrong with the G Fund?

There’s lots of investors in a fund that has no market risk. What could possibly be the problem?

INFLATION RISK

Inflation is the silent thief that sneaks up behind you and steals the value of your money.

Inflation is so quiet, it doesn’t even actually decrease the dollar amount in your accounts. Rather, it simply increases the cost of everything else around you.

Here is a graph compiling the yearly averages for the G Fund as well as inflation, shown side by side:

Image showing chart of G fund versus inflation 2006 - 2015

 

As you can see, the returns for the G Fund and inflation run pretty close to each other. But, this graph isn’t enough; we need to see what it looks like in dollar amounts.

Let’s look at a real life example:

Jane Doe retired from the US Postal Service in 2005.

She contributed to the TSP as much as she could during her working years and amassed $300,000 in her TSP at the time of her retirement.

Although she invested the majority of her account in the C Fund during her working years, she has since moved her TSP 100% into the G Fund.

Based upon these facts, I am going to construct TWO graphs from the time period 2006-2015:

1. Based upon the actual rates of return of the G Fund, not including inflation:

Image showing chart of actual rates of return of G Fund

 

2. Based upon the actual rates of return of the G Fund, net of inflation (the inflation rate was subtracted from the G Fund rate of return):

Image showing chart of rates of return of G fund adjusted for inflation

 

As you can see, when inflation is involved, the picture becomes much less rosy.

An account of $300,000 without the damaging effects of inflation would have risen to $400,936.96. When inflation was factored in, the actual purchasing power of the $400,936.96 would look more like $364,261.04.

A disparity of $36,675.92 is a pretty big difference if you ask me.

Also, if you take a look at the Inflation Adjusted Return Graph, you can see that although the G Fund is guaranteed never to lose it’s actual account value, it can lose PURCHASING POWER.

Purchasing power is something that many, outside of economists, think little of. However, should inflation rise to a level high enough such as it did in 2009, the inflation adjusted return could be negative; as shown here:

Image showing chart that illustrates loss of purchasing power of investing in the G Fund

 

What Can Be Done?

This is a hard question. Some would tell you to put it all in the C Fund, but that is too easy an answer.

These are some facts regarding the history of the TSP that can be telling for the future.

  1. The S Fund has outperformed all of the other funds over the past 10 years.
  2. The G Fund is the only fund to never have had a negative return in the past 10 years.
  3. The F Fund had only one year in which the return was negative (2013, yearly average of -1.68%) and a 10 year average of 4.74%
  4. The L Funds are the most diversified, although that doesn’t always mean great returns.

Is this all the information you need to make a decision on where to allocate? Of course not.

Everybody has different goals, objectives, and tolerances for risk. So, unfortunately, I can’t give you a one-size-fits-all answer. This is something that must be determined on an individual basis.

© 2016 Cooper Mitchell. All rights reserved. This article may not be reproduced without express written consent from Cooper Mitchell.

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About the Author

Cooper Mitchell is an Investment Advisor Representative for Dane Financial, LLC, a Registered Investment Advisor, as well as a licensed insurance agent for Dane Advisory Group, LLC. He welcomes questions from federal employees on retirement matters. You can find out more about him and his company at his website, fedretirementplanning.com. Dane Financial, LLC and Dane Advisory Group, LLC are affiliated companies.

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