Changes Coming to TSP Funds

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By on June 27, 2019 in Pay & Benefits with 0 Comments
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The Federal Retirement Thrift Investment Board (FRTIB), the organization administering the Thrift Savings Plan (TSP), has previously approved having lifecycle funds (L Funds) covering a five-year period instead of 10 years.

These funds are designed to move into more stable investments as participants approach retirement. The TSP is moving out with this change. Lifecycle funds with a five-year period instead of 10 will begin in the third quarter of 2020 if all goes according to plan. (See the list of funds later in this article.)

Recommendations for Changing TSP Funds

As part of an annual review, four general recommendations have been made to the Executive Director of the FRTIB. 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 reflecting these recommendations:

  • The L 2060 Fund and beyond will begin glide paths with 99% in stock investments instead 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 most be available late in 2020 and will have an initial stock allocation of 99%.

Here is how the L funds will look after these changes are made compared to the current lineup of the lifecycle funds:

Current Lineup Future Lineup
L Income L Income L 2045
L 2020 L 2025 L 2050
L 2030 L 2030 L 2055
L 2040 L 2035 L 2060
L 2050 L 2040 L 2065

The target date for launching the new funds is the third quarter of 2020. The organization will be conducting design, development and testing of the new approach prior to implementing the new structure.

The I Fund Benchmark Change

Plans are underway to alter the I Fund (International Stock Fund). The current benchmark for the I Fund is the MSCI EAFI Index. This index measures the stock market performance of developed markets outside of the U.S. & Canada. The I Fund has stocks from 21 developed markets and represents more than 600 companies in both large and mid-sized companies.

Using a New Index

The new index to be used is the MSCI ACWI ex-US IMI Index. It will be considerably different as more than 6000 companies are represented in the index with 22 developed markets and 26 emerging markets. It will also have large, medium and small companies represented.

A number of readers have previously commented that the I Fund should include emerging markets or that there should be an emerging market fund. The new benchmark will reflect some of these concerns when it is implemented.

Impact of Legislation in Congress

While the TSP is moving out with using a different index for the I Fund, a bill has been introduced in Congress that would impact using this stock index.

A bill (H.R. 2903) introduced by Congressman Jim Banks (R-IN) would prohibit TSP investments in China and Russia. The Congressman says this is necessary given the history of malice towards the United States from both countries.

“The governments of Russia and China have a long history of malicious activity against the United States,” said Banks. “If we are to confront the growing threats from these hostile countries, we should not be supporting their economies financially. This common-sense legislation would prevent federal money from entering countries that are actively attempting to undermine our global leadership.”

While there is no indication right now that this bill is likely to pass, it is worth keeping an eye on this as it would impact this change in the TSP.

© 2019 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47

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