Don’t mess with the G fund

When it comes to the safest investment option in their 401(k) plan, federal employees and retirees are split down the middle.

Although its returns (over both the long- and short-term) nearly always trail the stock, bond and lifecycle funds in the Thrift Savings Plan, by a lot, millions of TSP investors love, trust and count in the Treasury securities G fund to make sure their golden years are 24-carat.

The low-risk, low-reward nature of the G fund is what both fans and critics focus on. Workers and retirees with money in the G fund consider it the safest option in their in-house 401(k) plan. During the Great Recession hundreds of thousands of TSP investors pulled money out of the C, S and I funds and tucked it into the G fund, which they considered a safe harbor. They also missed the dramatic recovery (increase ) in the stock funds and the opportunity to buy shares in the C, S and I funds at bargain prices as the markets recovered. Many financial planners warn retirees that that having too much of their retirement nest egg in the low-growth G fund means that over a long retirement it will be eroded by inflation.

But one thing that both schools agree on is this: Don’t mess with the G fund.

Over the last 23 years the government has, briefly, suspended investment in the G fund 11 times. And it will happen again. And again. It happens when Congress has to act to raise the national debt ceiling to avoid defaulting on its creditors. Each time it happens many workers and retirees react with fear and anger even though experts say no harm is done. When it happened in March 2017, the Federal Retirement Thrift Investment Board issued this statement:

“The U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 25 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.”

A long-time observer and expert on the federal TSP added:

“The March issue of NARFE magazine — for members of the National Active and Retired Federal Employees association — contains an excellent story explaining the protection for TSP G Fund investors when the U. S. Treasury bumps up against the statutory debt limit and is consequently prohibited from issuing additional debt securities. By law, the G Fund must invest in Treasury securities; however, efforts to raise the so-called debt limit so that new securities may be issued are frequently delayed in the Congress due to partisan politics. NARFE describes the elegant solution to this recurring situation, which it says has fully protected G Fund investors on 11 occasions over the past 23 years and is quite a record of success.

“While on the subject, TSP investors who may be concerned by recent fluctuations in their C, S, or I fund balances may be pleased to discover that the G fund portion of their portfolio benefits from the same rising interest rates that many say are one cause of turbulence in the stock market. And for those who are concerned by the administration’s proposal to change the G fund interest rate, please remember this has been proposed before. NARFE and its sister organizations in the federal community defeated that proposal, and I am confident that they will rally to do so again. By law, the G fund is invested in special issue Treasury securities that bear the same interest rate as the special securities issued to the Social Security Trust Fund. When the Congress created the G fund in 1987,  it established this symmetry giving the G fund rate a rock solid policy foundation.

“None of this should be read to suggest that investors should ‘chase returns’ by altering their investment strategies based on short term investment performance. Rather, it is intended to demonstrate that a well-balanced TSP portfolio is sufficiently diversified to meet long-term investors’ needs regardless of changes in markets.”

Nearly Useless Factoid

By Michael O’Connell

Flying squirrels can make a 180-degree turn during flight.

Source: Soft Schools

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