Why are the TSP L Funds Allocated so Differently Than Other Target Date Funds?

The author offers an analysis of the L funds in the TSP as compared to other target date retirement funds offered by large brokerage companies. He points out the differences that federal employees should be aware of when investing in the TSP L funds.

Government workers, like those in any area of the economy, want to maximize their employee-eligible retirement savings plans. Noting the quality of the investments offered through your employer versus those on the public market is an essential step for investors to determine their best options for maximizing their savings. The Thrift Savings Plan or TSP is one of the most popular tools for this method, but some are noting that they need to take care when investing in their TSP because the investment options are certainly unique in their structure.

Understanding TSP Savings

The TSP plan offers a variety of index funds that are designed to track benchmarks in the market to fund a retirement plan. These are considered good investment options because the cost of maintaining these accounts are low, particularly when compared to other accounts designed for the same purpose. For example, in 2009 the expenses for TSP holders came to just .028 percent, allowing individuals to pay $0.28 for every $1,000 they had invested.

The offerings included in TSP funds are as follows:

  • C funds – These follow large-cap stocks and the S&P 500 index
  • F fund – A total market bond index including corporate, mortgage backed and government bonds
  • G fund – Short term securities from the U.S. Treasury. These can be set up as a proxy as well, though this option is only available to government employees.
  • I funds – Based on the international stock index so that small and mid-caps not included in the S&P 500 are available.
  • L fund – These target offerings based on the dates of funds mentioned in other categories. These are invested based on your goal retirement date. They can also be set up as a proxy to allocate particular holdings toward desired groups of funds.
  • S funds – The small cap stock index provides access to items tracked by the Dow Jones US Completion Total Stock Market Index.

TSP accounts are mainly designed to be easy to use. There is a basic streamlined setup which allows individuals’ access to five index funds provided by the government and supplement with five target-maturity investment options called L funds. These target date investments are options that most participants will rely on, and possibly for good results.  However, looking at the allocation compared to private sector versions there are some notable differences, specifically: the growth potential of the funds and their underlying allocation.

Noting the Growth Potential of Funds

Below is a listing of the TSP L 2020 fund alongside several notable 2020 target retirement date funds.  Next to each fund name is the percentage of the total assets invested in either corporate or government bonds, as of a recent public listing.  Note how much higher the fixed income allocation in TSP is than the others.  Specifically, approximately 43% of the 48% in the TSP L 2020 fund is in the G fund, or government bonds.  Within the others not only is the overall exposure lower, but the portion invested in fixed income is predominately corporate bonds rather than government.  This isn’t to suggest the allocation is incorrect or will guarantee a lower rate of return.  It is just an observation; the decision makers of the TSP L allocation have chosen for whatever reason to create a much more conservative model.

  • TSP L 2020 Fund – 48.5%
  • T. Rowe Price Retirement 2020 Fund (TRRBX) – 31.9%
  • Vanguard Target Retirement 2020 Fund (VTWNX) – 39.3%
  • Fidelity Freedom Fund 2020 (FFFDX) – 31.0%
  • American Funds 2020 Target Date Retire A (AACTX) – 25.73%

Missing Investment Options

TSP offers a lot of options but there are some portions of the market that are not included in this plan. Those that are planning on investing outside of this portfolio in traditional retirement options such as an IRA or Roth retirement plan will need to consider certain options that would better round out their portfolio.

Bond funding in the TSP plan does not offer any access to treasury inflation protected securities. There are also not many options for investing in international or emerging bonds. Generally speaking, these types of bonds should not make up the base of one’s retirement portfolio because they can be high risk. There is a chance that these bonds would gain no yields or generate income very poorly. However, there is potential for these bonds to be quite lucrative, particularly if investors do careful research when they make their choices. Some feel prohibiting access to these options in a TSP account is limiting the potential for generating better funds.

There is also the observation that the I fund, in spite of offering more access to international options, does not see growth comparable to other funds. Emerging markets like Eastern Europe, Latin America or Asia are not offered in I funds, and these offer some of the fastest growth in small-cap international funding. The inability to round out a portfolio with some of these more developing market options is seen as a possible shortcoming.

About the Author

Brian Kuhn CFP® is a financial planner at psgclarity.com in Maple Lawn, MD. He has been working with families since 2001 with a niche of federal employees. He is the author of The Personal Finance Handbook, a Guide to the Most Common Personal Finance Questions. Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC