Purpose of the TSP Lifecycle Funds
While probably not common knowledge among investors in the federal government’s Thrift Savings Plan (TSP), there is a policy that the agency will conduct a comprehensive review of the lifecycle fund asset allocations at least annually (with some exceptions).
Also, as noted in a memo to the Executive Director of the Federal Retirement Thrift Investment Board, the “TSP lifecycle funds are designed to be a long-term, risk-efficient strategy, and the risk and return objectives of the funds are intended to be consistent with an overall replacement rate…of a substantial portion of pre-retirement income.”
Changes to the Lifecycle Funds
Last year, a recommendation was made to change the allocation of stocks within the lifecycle funds. The purpose of the changes is to improve financial results for existing lifecycle fund investors without an unnecessary increase in the risk of investing in these funds.
As part of the annual review, there were four general recommendations to the Executive Director. These recommendations were:
- Implement a transitional approach to increase stock allocation at all ages in the L funds
- Increase the amount of exposure to international stocks
- Maintain the “to” approach so transitioning to the L Income fund still occurs at the age of first withdrawal
- Increase the assumed age of first withdrawal from 62 to 63
Here are the changes to the TSP funds that reflect these recommendations:
- The L 2060 Fund and beyond will begin glide paths with 99% stock instead of the former allocation of 90%. There will also be an L 2065 fund that will come out in July 2020 along with the L 2060 fund.
- L Income Fund stock allocation will increase to 30% from 20% over a period of up to 10 years.
- International stock will increase to 35% of overall stock allocation from the former level of 30% for all Funds.
- Total stock allocation for the L 2030, L 2040, and L 2050 Funds will be frozen at Q4 2018 levels for periods of years to facilitate the transition to the new L 2060 glide path. No overall stock levels will be increased for existing Funds, with the exception of the L Income Fund.
- Total stock allocation for the L 2020 Fund will decline at a rate that facilitates meeting the L Income Fund at its new July 2020 stock allocation.
- Rules for assigning automatic enrollees to age-appropriate L Funds will be modified to reflect the change in an assumed age of first withdrawal from age 63 to age 62.
The L 2030, L 2040, and L 2050 overall stock allocations will not change for a period of years before resuming their transitions from stocks to bonds. This pause will align the L 2030, L 2040, and L 2050 Funds with the L 2060 Fund. The L 2060 will be available in 2020 and will have an initial stock allocation of 99%.
What is the L Income Fund?
For readers who are not familiar with the purpose of the L Income fund, this fund is more conservative than the other lifecycle funds so it has a lower allocation of stocks than the other funds.
Its purpose is to preserve money to use in retirement but it still has some exposure to the TSP’s riskier assets (C, S, and I Funds). It does this to reduce the impact of inflation on the purchasing power of retirees.
The income fund is designed to provide current income for investors planning to start withdrawing from their TSP accounts in the near future and for those who are already receiving monthly payments from their accounts.
The L fund has a set asset allocation of investments and, unlike the other lifecycle funds, this allocation does not change. Also, the progression from a target date L Fund to the L Income Fund is automatic.