What is the Objective of the G Fund?
We get questions from readers at FedSmith.com, many of which are on the Thrift Savings Plan (TSP). This article is about the G Fund in the Thrift Savings Plan (TSP).
The objective of the G Fund is to preserve capital and generate returns above those of short-term U.S. Treasury securities. It has been successful in meeting this objective throughout the life of the TSP.
FedSmith does not provide advice to individuals on how to invest their money. Some of the questions we receive is for information that will impact a large number of readers.
The reality is that many people investing in the TSP have not taken the time to read through the pages of financial information about the TSP Funds. Not understanding some of this basic information may impact how a person decides to invest money for a secure financial future after retiring.
Understanding the G Fund
One reader asked this question: “If inflation takes off, will funds that are already invested reflect future returns with the increased interest rate that may be paid relating to this inflation?”
The answer is “yes.” Over time, the money you have invested in the G Fund will earn the interest rate paid in the current month.
Do not confuse the interest rate paid by the G Fund with a cost of living adjustment (COLA) or other adjustments related to a consumer price index. The G Fund interest rate is adjusted each month. It is not designed to match the rate of inflation. In fact, the biggest risk of the G Fund is that an investor will lose purchasing power over time as the rate may not keep up with inflation.
How is the G Fund Invested
The G Fund is invested in short-term U.S. Treasury Securities. These investments are issued by the Treasury Department for the TSP. The Treasury Department calculates the G Fund interest rate as the weighted average yield of approximately 183 U.S. Treasury securities on the last day of the previous month.
This means that while the G Fund itself is invested in short-term securities, TSP investors get a higher interest rate.
The interest paid by the G Fund interest is computed monthly. When inflation goes up, you will earn a higher interest rate when the interest rate paid on longer-term Treasury securities goes higher. Here is an example.
As of July 31, 2023, here are the net returns for the G Fund over a multi-year period:
- 1-Year: 3.84%
- 3-Year: 2.31%
- 5 -Year: 2.22%
- 10-Year: 2.22%
Inflation started impacting our purchasing power more than two years ago. When inflation was just starting to heat up, the G Fund returns were about 2.31%. After inflation impacted the interest rate being paid by Treasury securities, the rate has gone up to 3.84%.
All of your money invested in the G Fund receives the higher interest rate. If you invested $1,000 three years ago, and the interest rate this month is 3.84%, your total investment will receive the higher interest rate now being paid.
Long-Term Rates and Short-Term Security
The way the interest rate is calculated on the G Fund, along with investing in short-term maturities, gives TSP investors the advantage receiving longer-term rates.
In plain English, you get a very good deal the rest of America’s investors do not get.
Short-term notes are safer. No one knows what interest rates will be in 10 years or even in three months. The interest rates on Treasury notes for a 10-year note are usually higher than for a short-term note. In effect, with the G Fund, you get a higher interest rate on your money while investing in a safe fund.
Changing Habits of TSP Investors
Undoubtedly, the safety of the G Fund is why many TSP investors invest a considerable portion of their assets in this fund. At the end of July 2023, 28.7% of investor assets were in the G Fund.
There has been a considerable change in how TSP investors invest their money. For example, way back at the end of December 2009, those in the CSRS retirement system had 53% of their TSP accounts in the G Fund. Those in the FERS system had 44% of their investment in the G Fund.
As the stock market has increased over time, investors have concluded they can make more money in the long run by investing in stocks—even though the G Fund is safer. Stocks go up and down. The G Fund does not. For those who can stand the constant changes in the stock market, stocks have been a more profitable long-term investment.
The value of your TSP investments in the core TSP stock funds (C, S, and I Funds) will go up or down with the stock market. The interest rate on the G Fund varies over time. G Fund investors do not lose money even during a bear market. They are unlikely to make as much on their investment as stocks will provide during a bull market though.
Right now, the rate of inflation is declining after hitting a multi-decade high. We do not know what the stock market will do over the next few months or years. When inflation goes up, those TSP investors in the G Fund will see higher returns as the interest being paid on longer-term Treasury bills goes up. During a bull market, those in the G Fund will not receive the same return that stocks may provide. When the market goes down, G Fund investors will not see the value of their investments decline.
The objective of the G Fund is to ensure preservation of capital and generate returns above those of short-term U.S. Treasury securities. It has been successful in meeting this objective throughout the life of the TSP.