Understanding Your TSP Investment Options

What investment options are available within the TSP? Here is an overview of the basics of each fund.

The Thrift Savings Plan (TSP) is a great piece to your retirement package under the Federal Employee Retirement System (FERS). 

While the TSP plan is often touted for its low fees, one thing in particular that makes the plan attractive is a 5% matching contribution offered by the government. Above all else, please make sure you are contributing enough to get the full agency contribution, which is a combination of matching (up to 4%) and automatic contributions (1%).

What are the TSP’s investment options? 

The TSP offers 5 individual fund choices (C, S, I, F, and G), 10 lifecycle funds, and 2 retired funds. Blackrock Institutional Trust Company manages the core funds for the TSP plan, and these funds are only available within the TSP plan. (*As of October 22, 2020 FRTIB announced State Street Global Advisors has also been selected as an additional fund manager for the C,S,I, and F funds.)

The C, S, I, and F funds are index funds designed to match a broad market index, the idea being to give a representation of the overall stock and bond markets.

The G fund is a special fund created for TSP that has the guaranteed backing of the federal government.

The L Funds are simply target date funds that are a preset combination of the 5 individual fund choices.

Individual Funds

As mentioned, the Thrift Savings Plan comes with 5 individual fund options to build your account allocation. You can use these funds to make your own diversified portfolio, the same way TSP does for you with lifecycle funds. 

One important item to understand when we talk about equity funds and the underlying stock they own is market capitalization, or ‘market cap’. Market cap is the total value of all shares of a company’s issued stock. 

Market Cap = number of shares outstanding x share price 

We use this concept for comparison to understand how big a company is in relation to another. It also shows us how much investors are willing to pay to own a company’s stock, which may give insight into the company’s future prospects. Also, historically (and very generally) speaking larger companies have been less risky than smaller ones.

Let’s take a look at the options in more detail. 

C Fund

The Common Stock Index Fund is invested in a portfolio designed to match the performance of the S&P 500. This is a market-cap-weighted index composed of the 500 largest stocks in the United States. 

The S&P 500 is one of the most commonly followed indexes and is often referred to as an indicator of the overall U.S. stock market. The stocks within the index represent more than 80% of the market value of U.S. stocks – when people talk about the ‘stock market’ they are likely referring to the movement of the S&P 500.

Why invest in this fund? If you are a long-term investor looking for a growth-oriented portfolio, the C fund may be considered a big part of core holdings. Of the 3 limited choices, it’s one of the best options for a larger percentage of your money – buying large U.S.-based companies. 

S Fund 

The Small Cap Stock Index Fund is invested in a portfolio designed to match the performance of the Dow Jones U.S. Completion Total Stock Market Index. According to the TSP’s description, this fund is made up of small and medium-sized U.S. companies. 

A bit of an obscure benchmark, The Dow Jones U.S. Completion Total Stock Market Index consists of more than 3,000 companies. The average market cap for stocks in the index is around $2 billion, however, it also contains some very large companies – its top 10 holdings all have a market cap of over $25B, which are considered large companies. Holdings like Tesla ($400B), Lululemon ($40B), Square ($69B), and Workday ($50B) all find themselves included in this index, at least at the time of this writing. 

Why invest in this fund? Looking back over the longer history of the stock market, small and mid-size companies have offered higher returns than their larger counterparts while also carrying more risk. While the past 10 years have been a different story, mid and small-cap stocks provide a nice compliment to your core holdings and can help create a well-diversified portfolio. 

I Fund

The International Stock Index Fund is invested in a portfolio designed to match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index. This is a broadly diversified index that provides access to international diversification in large and mid-cap securities across 21 developed markets.

Why invest in this fund? Many investors feel that building a well-diversified portfolio, including non-US stocks, can reduce the overall amount of risk you are taking and provide opportunity. While our current viewpoint doesn’t support a significant allocation to international stocks, the fact remains that non-US stocks account for 46% of the world market capitalization and thousands of companies across the globe. 

F Fund

Fixed Income Index Fund is invested in a portfolio designed to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. This is a broadly diversified index of U.S. bonds – including Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and commercial mortgage-back securities. 

Many investors buy the ‘AGG’ as a hedge against equity risk – i.e. reducing the overall risk in your portfolio. With this fund, you own a little bit of everything in the bond market. It’s a conservative option, and it typically offers a higher interest rate than you will get with the G fund, however, there is principal risk involved.

G Fund

Government Securities Investment Fund. The G Fund’s objective is to produce a rate of return that is higher than inflation while avoiding credit risk (default) and market price fluctuations.

This fund is unique as the payment of principal and interest is guaranteed by the federal government. The G fund is invested in short-term U.S. Treasuries specially issued to the TSP. The interest rate resets monthly and is based on the average of all Treasury notes outstanding with 4 or more years to maturity.

Honestly, in my view, this is one of the best risk-free options that exists anywhere.

Lifecycle and Retired Funds

The lifecycle and retired funds consist of a preset allocation of the TSP’s 5 individual funds based on a targeted retirement date, and one fund that is designed to generate current income. 

The allocation of these funds is designed to change over time as you move closer to the target date. As you get closer to the target date, the amount of stocks decreases and the amount of bonds increases. This is in an attempt to generate a favorable risk-adjusted return and reduce risk as you age. The targeted allocations in the L funds are changed every quarter. 

Lifecycle funds offer instant diversification; however, they come with significant drawbacks. They are one-size-fits-all, meaning they do not take into consideration each investor’s unique circumstances. The L funds tend to lean to the conservative side in their allocation, and at the moment carry a significant international allocation, especially in the longer-dated funds.  

Which TSP funds should I invest in? 

I believe it’s to your advantage to take the time to build an allocation from the 5 individual funds that fit your situation. It’s equally as important to review your account allocation at least annually and make changes as needed. Your allocation should reflect how long you plan to work, how you feel about risk, and when you may need to access the funds for income.

Hopefully, this helps you to better understand the options you have to invest your hard-earned money in the TSP or provides a quick refresher on the TSP fund knowledge you already have. Being intentional with your decisions makes all the difference, no matter what the topic.

The content is developed from sources believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Stock investing includes risks, including fluctuating prices and loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of the developed markets, excluding US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

The Bloomberg Barclays US Aggregate Bond Index is an index of the US investment grade fixed rate bond market, including both government and corporate bonds. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

About the Author

Justin is the owner of District Financial Advisors, a firm focused on serving the needs of federal employees and their families. He is a Certified Financial Planner and has been helping people make the most of their money for over 21 years.