Also known as the TSP, the Thrift Savings Plan was introduced by Congress in 1986 as part of the Federal Employees’ Retirement System Act. Like a 401(k)-plan, which is offered to private sector employees, the TSP was created to give Federal employees and members of the uniformed services the opportunity to invest in a tax-advantaged account for retirement. The TSP is administered by an independent agency – the Federal Retirement Thrift Investment Board (FRTIB) – and as of June 30, 2020 boasts more than six million participants and more than $796 billion in assets under management, making it the single largest defined-contribution plan in the world.
The TSP offers plan participants the option to invest in five core funds, each representing a different component of the sprawling financial markets. Though the funds each cover a different sector and/or asset class within financial markets, every fund is designed to track the return characteristics of an underlying benchmark index. For instance, the F Fund seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of the total U.S. investment-grade bond market. Instead of picking individual winners and losers, which can be nearly impossible, not to mention time consuming and expensive, these broadly diversified funds offer exposure to myriad companies to mitigate the risk associated with poor performance by any one individual company.
In a 2020 survey administered by the FRTIB, 87 percent of participants in the TSP reported they were satisfied, with 42 percent of that group going so far as to say they were “extremely satisfied” with the TSP. At the end of the day, investing is simply a means to an end and that end is financial security. Through Congress’ action in offering the TSP to eligible participants, a powerful tool is now available to anyone who decides they want to achieve the financial security of their dreams.
Fund Graph
Monthly Fund Graph
Simply put, the L Fund helps eliminate the guesswork associated with choosing specific investments when saving for retirement. Each of the available L Funds includes a mix of the five core funds (G, F, C, S, and I) and was designed with unique investment strategies in mind, which can result in different desired outcomes. For instance, some L Funds prioritize the potential to earn high investment returns over longer periods, while others emphasize current and short-term investment income with principal protection. Put differently, younger participants can assume greater risks in pursuit of higher returns since interim market fluctuations are less impactful given their long-term horizons; on the other hand, participants nearing retirement cannot afford to risk their principal as they will likely need to draw on these funds soon.
The name of each L Fund includes a year, which is its “target date” (the date in which the invested capital is expected to be needed.) Understandably, the sooner the target date, the more conservative the allocation of the five underlying core funds; if the invested funds will be needed soon, it would be imprudent to take on too much risk in seeking higher returns. For longer dated funds, the investment allocation will automatically adjust every three months to reflect the approaching target date, and therefore the decreasing risk tolerance of the participant. Eventually, when the target date is reached, any invested capital becomes part of the L Income Fund, which assumes a participant is currently withdrawing or will be withdrawing funds within the current year.
