TSP Investments: Risk vs. Reward

In the five years since they’ve been an option, federal and military investors have slowly taken to the automatic-pilot, fire-and-forget Lifecycle funds. Currently about 12 percent of the $255.7 billion in the federal Thrift Savings Plan is invested in one of the target-date L-funds.

The idea behind the L-funds is that the investor decides when he/she expects to start withdrawing money from the TSP and selects the L-fund (L-Income, L-2010 through L-2040 fund) as their investment vehicle. The funds are rebalanced regularly to give the investor (as determined by professionals) the desired mix of stocks, bonds and G-fund investments which grow more conservative as the target date approaches.

The L-fund is seen as the ideal vehicle for people who know they don’t know much about investing, or who don’t want to spend time trying to second-guess the market. When stocks plummet many people sell. And when the market recovers they buy. The L-funds do the opposite and buy when the markets are down and sell when they are up to maintain the portfolio’s balance.

As one financial planner said, “it allows people to sleep at night when the market is going nuts and not to panic when it drops and then try to jump on the roller coaster when it heads up.”


The federal TSP is considered by many, if not most professionals, from Vanguard founder John Bogle to CBSMoneyWatch columnist Allan Roth, to be the best 401k plan around. Period.

It offers a variety of funds (including the L-funds) that cover most of the U.S. stock market, a bond-index fund and a special G-fund composed of guaranteed U.S. Treasury securities that are not available to the general public.

Some investment experts say that the L-funds, which are similar to but not identical to, L-funds offered by Vanguard, Charles Schwab, Fidelity, T. Rowe Price and others are too conservative. Some people who think that (who want a higher mix of stocks in their portfolio, for example) switch from the 2020 to the 2030 fund (or 2030 to 2040).

But there are some financial planners who are down on the L-funds because, they say, they don’t give investors enough exposure (aka risk) to developing markets overseas. While the I-fund covers many parts of the world it doesn’t include the stock markets of some rapidly developing countries, such as China, India and Russia.

Backers of the steady-as-you-go L-funds say there is a reason those superheated economies are not part of the L-fund. The idea behind the TSP is to expose investors to the minimum risk.

Who knows?

Today at 10 a.m., on our Your Turn radio show, financial planner Jerry Cannizzaro talks about the TSP and the pros and cons of the L-funds. After all it is your money.

And at 10:30, we’ll talk to benefits strategist John Elliott about what happens to you (or your spouse) if you die on the job? Or after retirement? What are your financial rights, benefits and options? Odds are you don’t know what you don’t know.

If you have questions for the show, you can e-mail me at: mcausey@federalnewsradio.com. Listen live on your computer at www.federalnewsradio.com or on the radio at 1500 AM (D.C. region only).

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