The Senate passed the Smart Savings Act this week, legislation that would change the automatic enrollment in the Thrift Savings Plan for federal employees to use one of the Lifecycle funds instead of the G fund. The bill now moves on to the House for further deliberation.
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, however, 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 over time. This is the primary impetus for the legislation.
When it was introduced, Rep. Darrell Issa (R-CA), one of the sponsors of companion legislation in the House, referenced the inflation risk from the G fund, saying, “The Smart Savings Act will ensure that workers who are planning ahead for retirement are investing in an account that works for them at every stage of their career. Currently, the default fund [G fund] is comprised of government securities, which historically provide very low returns. The mix of offerings in an L Fund is designed to give higher returns, while decreasing risk as individuals near retirement. According to the TSP, making L Funds the default investment can help workers better prepare for retirement than investment in the G Fund over the course of their career.”
For more information on the Smart Savings Act, see Changing the Automatic TSP Allocations for New Employees.