The lifecycle funds in the Thrift Savings Plan (TSP) are made up of the core funds in the TSP. The core funds are the C, G, F, S and I funds. The lifecycle funds consist of different percentages of these core TSP funds, and the allocation percentages change over time as one moves closer to retirement.
The more aggressive TSP funds are the funds for federal employees who will be retiring a number of years from now. The most aggressive lifecycle fund is the L2050 fund. The least aggressive lifecycle funds are for older employees who are currently retired (or about to retire) or do not have many years before they retire. The least aggressive lifecycle fund is the L Income fund. The least aggressive funds have a higher percentage of bonds (the G and F funds). The more aggressive lifecycle funds have a higher percentage of stocks (C, S and I funds).
The target “maturity date” for the lifecycle funds is the projected date that a TSP investor will begin withdrawing money from the TSP. The maturity date may not necessarily be the year in which a federal employee retires as some people will have reasons not to begin withdrawing money when they retire from federal service.
The lifecycle funds were created as a series of funds that grow more conservative over time. They are also designed to keep investment costs low and to enable TSP participants to have automatic diversity in their investments. The percentage of TSP investors in the lifecycle funds is relatively low compared to the core funds, although the percentage of those investing in the lifecycle funds continues to grow. Currently, about 17% of TSP assets are in the lifecycle funds.
Should the investment allocations for the lifecycle funds be changed?
A recent report by Mercer, a financial services company, says they should be. Mercer recommended to the Federal Retirement Thrift Investment Board (FRTIB) changes to the allocations for the lifecycle funds.
In reviewing the current structure of the lifecycle funds, there were several objectives:
- First, to provide for sufficient retirement income for career federal employees in the FERS program.
- Second, to preserve capital preservation as the employee gets closer to retirement.
- Third, limiting the likelihood of a FERS employee running out of assets during retirement.
In the report, Mercer recommended:
- More investment in the G fund and less investment in the F fund.
- Less investment in the S fund
- A slight investment in the I fund allocation to reach a consistent 3o% of equity across the lifecycle funds.
The current allocation of the TSP core funds into the lifecycle fund are as follows:
Allocations | 2050 Portfolio | 2040 Portfolio | 2030 Portfolio | 2020 Portfolio | Income Portfolio |
---|---|---|---|---|---|
C Fund | 42 | 38 | 34 | 27 | 12 |
S Fund | 18 | 16 | 12 | 8 | 3 |
I Fund | 25 | 21 | 19 | 15 | 5 |
F Fund | 5.1 | 6.2 | 6.1 | 5.6 | 6.0 |
G Fund | 9.9 | 18.8 | 28.9 | 44.4 | 74 |
Total | 100 | 100 | 100 | 100 | 100 |
Here is how these allocations would change under the recommendation by Mercer:
Allocations | 2050 Portfolio | 2040 Portfolio | 2030 Portfolio | 2020 Portfolio | Income Portfolio |
---|---|---|---|---|---|
C Fund | 44.4 | 39.8 | 34.9 | 26 | 11.2 |
S Fund | 14.8 | 12.4 | 10 | 6.9 | 2.8 |
I Fund | 25.3 | 22.3 | 19.3 | 14.1 | 6.0 |
F Fund | 3.1 | 5.1 | 5.4 | 5.3 | 6.0 |
G Fund | 12.4 | 20.4 | 30.4 | 47.7 | 74 |
Total | 100 | 100 | 100 | 100 | 100 |
At least one financial advisor thinks the Lifecycle funds are a poor investment for federal employees that utilize the TSP. Dave Ramsey is a financial advisor who frequently tells federal workers on his radio show to stay away from the L funds and instead invest solely in the C, S, and I funds.
While these changes aren’t likely to change the minds of the Dave Ramseys of the financial world, it is at least possible that if they were implemented it could lead to higher returns for federal workers who choose to invest inside of one of the L funds.