Thrift Savings Plan (TSP) Benefits and Challenges

The Thrift Savings Plan is an important component of your retirement plan, but it’s up to you to utilize it to its full potential. The author offers some benefits and challenges of the TSP as well as some investment approaches to consider.

What can we expect from the markets and economy in the coming years and how will this affect decisions about investing in TSP? TSP is such an important component of your retirement plan and it is up to you, the contributor to utilize it to it’s fullest potential. It has been referred to as the model for 401(k) plans, however, like any type of investing “one size does not fit all,” so it is important that you have the knowledge to make prudent decisions based on your personal situation.

The Benefits:

  • TSP has the lowest expense ratio of any defined contribution plan that I know of. Less than .03 percent annual costs.
  • There are huge economies of scale among the 5 TSP funds. While keeping it simple, it’s participants are still given exposure to the entire U.S. stock market, most of the international market, the U.S. bond market and a special government fund that yields long term bond returns without any loss of principal.
  • Access to the various Lifecycle funds, each consisting of the five (5) primary funds in varying portions, which become more conservative over time.
  • You are in control of how much to contribute up to the IRS limits: $17,500 for 2014, plus an additional catch-up of $5,500 if you are age 50 or older.
  • If you are in FERS the government matches your annual contributions up to 5%. Contributing less than 5% basically means you are giving up free money.
  • You have a choice of contributing to the Traditional TSP and getting a tax deferral on your contribution now, or contributing to Roth TSP and paying tax in today’s known tax rate environment. The goal of the Roth TSP is to accumulate and compound your earnings into a harvest of tax-free money.

The Challenges:

  • Managing your TSP is your responsibility. It is not enough to merely contribute to TSP, you need to determine what is the best investment strategy for your own goals and risk tolerance.
  • Knowing how much risk you can tolerate.
  • How should you allocate the TSP funds given your goals along with the current and future market conditions?
  • When the stock market is doing well and the TSP funds are going up, all is well. But when we are in a down or sideways moving market are there any protection strategies that can be used?
  • How do economic concerns such as: Unemployment; Fed Tapering; higher stock valuations; Euro crisis; housing rebound; The Affordable Care Act and other worries impact the TSP funds?

I am often asked what is the best approach to take in managing one’s TSP. You should first determine what approach you are going to take: a tactical or a strategic investment method. Either approach may be right for you, but it might help you to know the basic differences before choosing.

Tactical Investing

Tactical investing is a short-term approach that uses current information to determine the right tactic for an investment portfolio. This information may be drawn from market movements, specific indices, sectors, or countries. It may involve taking a long (ownership) position or using short (leveraged) positions. The tactics change as the information changes. There are many different tactical approaches to investing.

Here’s an example of a typical tactical investing strategy using the TSP:

As the pressure of rising interest rates continues to increase, it will have a direct impact on bonds in your portfolio. Over the past 15 years, the F Fund has generated solid returns and has been a cornerstone of protection for many federal employees. As the winds of change are upon us, a tactical investor with the view that interest rates could continue to rise might suggest finding better protection and potential value out of reducing this type of exposure and reallocating those assets to a position that does not have as much interest rate sensitivity, such as the G Fund.

At any given time, analysts believe certain sectors or asset classes are overvalued and that others are undervalued. Tactical investors and tactical investment managers follow this type of analysis and buy the undervalued sectors and avoid those that are overvalued.

Tactical investing requires ongoing monitoring and continuous analysis of the markets. If you do not have the knowledge or the time to do this on your own, it may help to work with a professional financial advisor. You will want to make sure the advisor is very familiar with the TSP funds, your personal objectives and risk tolerance, and can help you make smart decisions with your portfolio.

Strategic Investing

Strategic investing is a long-term approach based on asset allocation and Modern Portfolio Theory.* Strategic investors use long-term market characteristics to build portfolios they believe will equal the markets return over time periods of 5 years or more. Strategic investors generally use a passive approach composed of index funds.

Here’s an example of a typical strategic investing strategy:

An investor or investment manager builds an asset allocation of 50% equities, 45% bonds, and 5% cash.

Over the long term, the strategic investor allows this balanced position to play out. Knowing that they are well diversified and will be exposed to both good markets and bad markets, they count on a nice return through a full market cycle. They simply rebalance the portfolio periodically to maintain the 50%, 45%, 5%, weightings.

Combining Tactical and Strategic Investing

Both approaches have devotees who believe their method is better than the other. My belief is that most investors benefit by combining a strategic long-term asset allocation strategy with a shorter term, more actively managed tactical approach. The strategic approach helps investors find a balanced, diversified portfolio. The tactical approach offers the possibility of beating the market by being more defensive when asset class valuations are high and more aggressive when valuations are low. This combination of tactical and strategic methods is often referred to as “Core and Explore” investing. It provides the stability of the strategic approach with the potential benefits of tactical investing.

If any of these challenges affect you, you are not alone. TSP is an awesome tool to help you meet your retirement goals. Getting good information and knowing what to do with it can be both difficult and time consuming! So, where do you start?

* Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. This is possible, intuitively speaking, because different types of assets often change in value in opposite ways. Source:

About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.