A Brief Explanation of the Thrift Savings Plan (TSP)

I love the TSP and the fund options it offers. Participants (generally government employees and military) have access to very low cost index fund options and a handful of target date funds (L Funds) that incorporate different combinations of the individual index fund options depending on what stage you’re at in your retirement savings journey. I wish more employer sponsored plans mirrored the TSP’s simplicity, low costs and efficiency. Employees may or may not have access to a match on deferrals, depending on their employment class.

The TSP has a number of different fund choices available. The G Fund invests in short-term Treasury securities that are specifically issued for the TSP. The principal and interest are guaranteed by the US Government but they are not inflation protected. That is, these funds may have returns below the inflation rate.

The C Fund is the common stock fund designed to replicate the returns of the S&P 500. The S Fund doesn’t follow the Dow Jones Industrial Average but rather the Dow Jones Completion Index. This means that it essentially includes small and mid-sized US companies not included in the C Fund. Owning the C Fund and S Fund together essentially gives you coverage of the entire US stock market.

The TSP also offers the F Fund that is a broad bond market index fund and the I Fund that invests in an international stock index. All of the TSP funds are exclusive only to the TSP. Non-governmental employees do not have access to them; hence why they don’t have ticker symbols.

Participants may consider choosing one of the L Funds. Currently the TSP offers an L Income Fund, L 2020, L 2030, L 2040, and L 2050. The funds move from conservative (L Income) to aggressive (L 2050) depending on your retirement horizon and risk tolerance. They also offer excellent diversification among a broader range of asset classes versus only the three funds you hold individually. Over time, these funds gradually become more conservative the closer you get to your retirement date.

One potential downside to the L Funds (or any target date fund) is that you run the risk of the fund becoming too conservative (investing more heavily in bonds) as the fund progresses toward the retirement target date. In other words, the conservative returns from the fund aren’t able to keep pace with the retiree’s withdrawal rates. Dr. Wade Pfau and Michael Kitces have written that actually increasing equity exposure may reduce the probability of running out of money in retirement (portfolio failure) and the magnitude of failure.

If you’re on of the lucky ones that has access to the TSP and not utilizing it, start. If you are utilizing it, it never hurts to revisit your allocations, fund choices and contributions. If you have question, connect with competent professional that understands the TSP.