Diversification Can Be Difficult For TSP Participants

The author describes pros and cons for adding more diversification options to the TSP.

With the stock market hitting all-time highs, it is not surprising that some Thrift Savings Plan participants may be looking to lock in profits and diversify some of their money out of stocks.

Year-to-date, the C Fund (which attempts to match the performance of the Standard and Poor’s 500 Index) is up 18.5%, while the S Fund (which includes stocks of U.S. companies not included in the S&P 500) is up 19.48%. Even the I Fund (stocks of international companies) is up more than 14% since January.

Ideally, TSP investors would like to move some of their profits into investments that are less correlated with stock prices so to gain some protection in case the stock market moves down.

Diversification choices lacking within TSP

Unfortunately, there are very few choices for the TSP participant. Normally, TSP participants could diversify by moving some of their funds into the F Fund, which reflects the bond market. 

In theory, bond prices would decline when stock prices rise, and similarly bond prices would rise as stock prices fall. Likewise, a slowing economy should reflect less demand for loans, lower interest rates, and higher bond prices along with lower stock prices as investors anticipate lower future earnings.

When TSP was devised, the relationship described above between the C Fund and F Fund held true, but in the current economic reality, bonds are more strongly correlated to stocks thanks to both investments being driven by Federal Reserve activities.

With the Federal Reserve continuing to signal that it will lower interest rates even as the stock market reaches new highs, not only have stock prices moved higher, but bond prices have also increased.

Year-to-date the F Fund is posting a 6.11% increase; not equal to stocks, but certainly a significant increase and well above the current rate of inflation.

So, with the C, S, I, and F Funds all moving in the same direction, within TSP the only hope for diversification is the G Fund (investing in nonmarketable short-term U.S. Treasuries) with its year-to-date increase of 1.28%.

While it is true that the G Fund will protect against market downturns, it does not offer any inverse correlation to stocks. That is to say, when stocks rise or fall, the G Fund cannot be relied on to move in the opposite direction. That was the role traditionally played by the F Fund. 

Regardless of what you think of the role the Federal Reserve and Quantitative Easing (QE) has played in the economy since the last recession, federal intervention in the markets has removed bonds (and the F Fund) from their role as counterweights to stocks.

Reasons for diversification

Other than wanting to lock in profits, investors may wish to diversify their assets for other reasons.

While a strong dollar and low inflation has boosted U.S. stocks, fear that the dollar may be slipping, as interest rates fall, is boosting commodities that trade in dollars, such as oil and gold. A lower dollar will boost the value of these assets.

In addition, rather than turn to gold, some investors have turned to cryptocurrencies to add to their diversification. None of these strategies are possible within TSP.

Beyond wanting to protect financial gains, investors have other concerns that are difficult to address with the current options offered by TSP.

Back in April, I wrote a piece titled “Is a C Fund ESG in TSP’s Future?” reflecting a new investment trend in wanting to apply a set a set of Environmental, Social and Governance (ESG) factors to investments. 

Since then, this trend is only continuing to grow with a sizeable group of investors now wanting to avoid companies involved with fossil fuels due to concerns over climate change. Again, that is an option that is impossible with the current TSP fund choices unless you choose the G Fund.

I don’t envision TSP moving that radically towards alternatives such as Bitcoin, but adding fund options that would allow greater choice would encourage current Federal employees to put a greater share of their salaries into TSP and give investors greater freedom to invest their money.

Reasons against allowing more choices in TSP

While most investment advice favors a diversification of assets, there are two good reasons why TSP keeps a small number of investment options for participants, and we need to acknowledge them

1. Few choices make it easier for individuals to decide where to allocate their funds

There is evidence that too many choices can lead to poorer investment choices. This began with the now infamous “Jam Study” conducted by Sheena Iyengar and Mark Lepper, which found that people had greater satisfaction when their choices were limited. Since then, other studies have confirmed their findings.

A 2006 Harvard Business Review article summarizes the idea: 

“Choice is good for us, but its relationship to satisfaction appears to be more complicated than we had assumed. There is diminishing marginal utility in having alternatives; each new option subtracts a little from the feeling of well-being, until the marginal benefits of added choice level off. What’s more, psychologists and business academics alike have largely ignored another outcome of choice: More of it requires increased time and effort and can lead to anxiety, regret, excessively high expectations, and self-blame if the choices don’t work out. When the number of available options is small, these costs are negligible, but the costs grow with the number of options. Eventually, each new option makes us feel worse off than we did before.”

Fewer choices makes it easier for TSP participants to allocate their money with less anxiety.

2. Administrative costs

TSP expenses remain low, which should result in increased returns to fund participants. TSP expresses these costs as an expense ratio for each fund (The expense ratio is calculated by determining the total administrative expenses charged to that fund during a specific period, and dividing it by that fund’s average balance for that period.).

For 2018, TSP’s net expense ratio was 0.040% for the G and S funds (and for the L funds), and 0.041% for the F, C, and I Funds. For example, if you invested in the G Fund in 2018, earnings were reduced by 40 cents per $1,000 of your G Fund balance.

TSP has always been proud of its low administrative costs. By traditional standards, their expense ratios are very low, although competitive pressures to lower costs continues in the investment industry, and TSP can no longer claim to have the lowest costs in the industry.

For example, Fidelity investments offers four plans with zero expense ratios. In addition, the Schwab S&P 500 Index (SWPPX) offers an expense ratio of 0.02%, or $2 for every $10,000 invested. There is no minimum initial investment. The Fidelity 500 Index (FXAIX) expense ratio is also 0.02%. There is no minimum initial investment.

These remain exceptions to generally higher expense ratios charged by most investment managers, but they do damage TSP’s claim that they can offer lower costs only by not administering as many plans.


The investment world is changing quickly with sharp competition bringing more money to low-cost and passive investments, which is traditionally the area that TSP has excelled.

TSP remains a strong option for long-term investors focused on their retirement savings, but like all investment funds, the Federal Retirement Thrift Investment Board (which administers the Thrift Savings Plan) needs to consider adding plans that will allow investors greater diversification and make TSP more competitive in the fast-changing world of asset management.

About the Author

Michael Wald is a public affairs consultant and writer based in the Atlanta area. He specializes in topics related to government and labor issues. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.