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
The G Fund takes a unique approach to investing in U.S. Treasury securities; the result is an income-focused investment fund that carries no risk of loss of principal, all while yielding higher relative rates than its conventional peers. Through its preferential relationship with the U.S. Treasury, the TSP is granted special access to securities that allow the G Fund to earn rates that are generally higher than rates for equivalent, marketable U.S. Treasuries available to the public. The G Fund therefore aims to earn rates of return above inflation while shielding the fund from any risk of loss of principal. By investing in short-term U.S. Treasury securities, payments are guaranteed by the U.S. government and carry zero “credit risk”, and actual investment earnings are solely comprised of interest income. The interest rate on invested capital is established in advance as the weighted average yield of all outstanding Treasury notes and bonds with at least 4 years until maturity.
The F Fund grants access to the U.S. bond market via investments that generally earn rates of return higher, over time, than those offered through simple money market funds, all while maintaining relatively low risk exposure. 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. Since the F Fund is broadly diversified and only contains investment-grade securities, “credit risk” is comparatively low; the F Fund is still exposed to general market and prepayment risk, respectively. Investment earnings are generated from interest income and gains (or losses) in value from the underlying securities.
The C Fund prioritizes the potential to earn high investment returns over longer periods by investing in and offering exposure to large- and mid-cap stocks of U.S. companies within a broadly diversified portfolio. The C Fund seeks to track the investment results of the Standard & Poor’s 500 Stock Index (S&P 500), which measures the performance of the large-capitalization sector of the U.S. stock market. Though the C Fund is broadly diversified across hundreds of different companies, there is risk of loss if the underlying S&P 500 index declines in value within a given period. Investment earnings are generated from dividend income and gains (or losses) in value from the underlying securities.
The S Fund prioritizes the potential to earn high investment returns over longer periods by investing in and offering exposure to mid- and small-cap stocks of U.S. companies within a broadly diversified portfolio. The S Fund seeks to track the investment results of the Dow Jones U.S. Completion Total Stock Market (TSM) Index, which measures the performance of those companies in the U.S. stock market not covered by the S&P 500 Index. Designed to be one of the broadest measures of the U.S. stock market, the index offers exposure to returns on domestic stocks that do not qualify for the S&P 500 index. Though the S Fund is broadly diversified across hundreds of different companies, there is risk of loss if the underlying TSM index declines in value within a given period. Investment earnings are generated from dividend income and gains (or losses) in value from the underlying securities.
Recommendations are dynamic and continuously evaluated with a keen eye towards everything affecting financial markets. Utilizing both quantitative and qualitative elements, the recommendations draw on extensive analysis and an in-depth assessment of international and domestic factors; the significance of such factors is generally weighted towards those with a more long-term orientation. Notably, a few of the major catalyst influencing recommendations are: macroeconomic data (inflation, gross domestic product (GDP), unemployment levels), fiscal policy (stimulus packages, tax regime, government spending), monetary policy (Federal Open Market Committee (FOMC) decisions, interest rate policy, asset purchase programs), geopolitics (trade deals, foreign relations, domestic elections) and general market sentiment (stock and bond market price action, consumer confidence, and investor outlook.) These weekly recommendations are thus meant to offer general guidance on financial market performance in the near- and long-term such that the goal of outperformance relative to otherwise unsophisticated investing strategies may be expected.
The I Fund prioritizes the potential to earn high investment returns over longer periods by investing in and offering exposure to large- and mid-cap stocks of international companies in developed countries. The I Fund seeks to track the investment results of the MSCI Europe, Australasia, Far East (EAFE) Index, which measures the stock market performance of development markets outside of the U.S. and Canada. Though the I Fund is broadly diversified across hundreds of different companies, as well as over a dozen different countries, there is risk of loss if the underlying EAFE index declines in value within a given period. Investment earnings are generated from dividend income, gains (or losses) in value from the underlying securities, and changes in the value of currencies relative to the U.S. dollar.
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.