Dave Ramsey Hates the TSP L Funds!

Should federal employees invest in the TSP L Funds? Not according to Dave Ramsey.

What does Dave Ramsey think about the TSP’s L Funds? He held nothing back with his contempt for them versus the core Thrift Savings Plan stock funds during a recent call on his radio show.

National radio talk show host and financial advisor Dave Ramsey answers questions for his listeners each day on his show. One federal employee recently asked Ramsey if he (the employee) should invest in the Lifecycle (L funds) inside of the TSP.

Ramsey was quite direct in his disdain for this idea in his response:

No, I hate the Lifecycle funds; they’re awful. They adjust your investments automatically and the adjustments are uber, crazy conservative. If you’re in the TSP, I recommend putting the vast majority in the C plan. It is the premiere plan of the entire TSP. It is more like an index fund and it has done very well. I would put 80% into that, 10% into the S, and 10% into the I.

Dave Ramsey is on the record as being very much against the asset allocation theory when it comes to investing and planning for retirement which makes his view of the L funds predictable. He says that while it’s a popular concept in the financial community, the reality is that it is too conservative and investors following this strategy will fall behind to inflation in the long run.

A quick analysis of data on the historical returns from the TSP would seem to indicate that Ramsey has a point.

Since its inception in 1988, the C fund, which tracks the S&P 500 index, the standard indicator of the overall U.S. market, has produced an average annual return of 12%. When compared to the G fund, which has only returned 5.4% in the same time period, it’s easy to see that an investor who puts money into the TSP and leaves it there for an entire working career would fare much better overall with the C fund.

And that is, in fact, largely what Dave Ramsey recommends for federal employees when it comes to investing the TSP. He suggests a mix that uses the C Fund, S Fund, and I Fund only and suggests completely avoiding the G Fund, F Fund and the L Funds because this allocation of funds will produce the best return for a federal employee over a long period of time, provided that he stays invested and keeps contributing on a regular basis.

The Lifecycle funds have only been around since mid-2005. Data from 2006 (the first full year of returns) through 2014 show that the L 2040 fund, the most aggressive of the Lifecycle funds, has produced an average annual return of 8.24%. The C fund has an average return of 10% in those same 9 years.

To read more about the L Funds, see Is a Lifecycle Fund the Best Choice for Your Thrift Savings Plan?.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce.