A bill was introduced in the House on March 11th entitled the “Smart Savings Act.” The “Smart Savings” title refers to changing a basic part the federal government’s Thrift Savings Plan (TSP) for new federal employees.
The bill has bi-partisan support having been introduced by Congressman Darrell Issa (R-CA) and co-sponsored by Elijah Cummings (D-MD), Rob Woodall (R-GA), Stephen Lynch (D-MA), Gerald Connolly (D-VA), and Blake Farenthold (R-TX). Congressman Issa is Chairman of the House Oversight and Government Reform Committee.
Current Allocation System and Proposed Changes
Currently under the TSP, all new federal civilian employees are automatically signed-up to have 3 percent of their basic pay deposited into the TSP’s G fund. This is usually considered the safest investment in the TSP as their money is invested in government securities that are specifically issued for the TSP. Historically, the G fund also provides a low return compared to the stock funds and, whether they realize it or not, G fund investors may lose purchasing power due to inflation. However, the initial investment is considered very secure.
The allocation can be changed by the employee who may choose to put the money into other TSP funds, to change the amount of the contribution or to end contributions into the investment account.
A major advantage of participating in the TSP for a federal employee is that investors also receive a 3 percent match and a 1 percent agency contribution as long as they are investing in to the TSP. Stated differently, those that choose to cancel their allocation to the TSP are giving up the “free money” provided by the government as additional contributions. The government started to automatically sign up all new federal civilian employees in August of 2010 to encourage employees to take advantage of this program to ensure they will have a greater income when they retire–even if they dislike the short term disadvantage of setting aside money each pay period for that purpose right now.
The main purpose of this new bill is to change the default enrollment fund in the Thrift Savings Plan for new hires from the G Fund to the lifecycle (L) funds. The lifecycle funds are designed to provide automatic diversification in the various TSP funds. Younger federal employees would have a more aggressive lifecycle fund with more of their money invested in stocks. The lifecycle funds become more conservative with a higher bond allocation as they get nearer to retirement. (See Is a Lifecycle Fund the Best Choice for Your Thrift Savings Plan?)
The language in the bill reads:
“[I]f an election has not been made with respect to any sums available for investment in the Thrift Savings Fund, the Executive Director shall invest such sums in an age-appropriate target date asset allocation investment fund, as determined by the Executive Director.”
The bill directs the Executive Director for the Thrift Savings Plan to issue guidance implementing provisions of the law within nine months of the bill’s passage and would take effect the date that the guidance is issued. It would only apply “to individuals enrolled in the Thrift Savings Plan on or after such date” (as the guidance is issued).
Disadvantages of the G Fund
While the G fund is an excellent option for including in TSP investments, there are disadvantages. It is likely many new federal employees will not be familiar with the characteristics of each of the TSP funds and how they should allocate their TSP investments to provide more income after they have retired–perhaps decades into the future.
The government securities fund is stable but does not provide significant returns.
For example, in 2013, the G fund had a return of 1.89% for the year. That is better return than many money market funds and it provides safety for the investors’ principle. On the other hand, the C fund had a return of 32.45%, the S fund returned 38.35% and the I fund returned 22.13%. While 2013 was a particularly good year for stock investments, over time stocks generally provide a better rate of return than bond funds. In other words, a more diversified investment portfolio for younger employees with many years before retirement makes more sense and the lifecycle funds provide a way to automatically diversify the investments between the TSP’s stock and bond funds. (See Big Year for TSP Stock Investors: C Fund Return 32.45%)
One other fact that often dismays some investors in the G fund is that the government securities of the G fund are used to fund the government whenever there is a delay in increasing the debt ceiling–an event which has been required on a regular basis as the federal government’s spending has substantially exceeded revenue over the past few years. In effect, the G fund is used as part of a government accounting gimmick to continue to fund the government until there is legal authority to borrow a greater amount of money to fund the spending deficit. (See Borrowing from the G Fund (Again) to Offset the Debt Ceiling)
While that is unlikely to be the reason for introducing this bill, it is a consideration for some TSP investors who do not like their money in this fund to be used in this way by the federal government.
Automatically investing money into the lifecycle funds for new federal employees in this way is probably a good idea. It is likely to provide greater returns over time for the employee than just investing in the G fund will provide. It also does not restrict an employee from investing in any way he chooses–an employee can make a change to put all of his investments into more aggressive stock funds or all into bond funds or is free to use any other allocation strategy.
But, for those new federal employees who are not experienced investors and likely to be confused by the options in the TSP when starting a new job, the appropriate lifecycle fund is a good option for their investments unless or until the employee decides otherwise.