TSP’s G fund has steadily declined for 30 years, belying reputation for stability

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On a large enough scale, steady decline is indistinguishable from stability. That’s the case with the Thrift Savings Plan’s G fund, favored by many federal investors as a bulwark against volatility. Over the past 30 years, it’s delivered steadily declining rates of return, falling from an annual return of 8.9% at its peak in 1990 to 2.24%...


Best listening experience is on Chrome, Firefox or Safari. Subscribe to Federal Drive’s daily audio interviews on Apple Podcasts or PodcastOne.

On a large enough scale, steady decline is indistinguishable from stability. That’s the case with the Thrift Savings Plan’s G fund, favored by many federal investors as a bulwark against volatility. Over the past 30 years, it’s delivered steadily declining rates of return, falling from an annual return of 8.9% at its peak in 1990 to 2.24% in 2019, with few upturns in between.

And 2020 is shaping up to be even worse.

“It may be that the G fund this year, for the year the return might be 1% or less, which would mean it would be another 50% lower than last year,” Arthur Stein, a former congressional economist who now advises current and former federal employees on their TSP and other investments, said during an interview.

The current year-to-date return for 2020 listed on TSP.gov stands at 0.76%.

But why has the G fund been declining for so long, and why does it have such a reputation for stability if that’s the case?

The answer to both of these questions has to do with what the fund is invested in.

“The G Fund, by law, is invested in special non-public interest-bearing Treasury securities obligations. The interest rate of these securities resets monthly and is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. So, the G Fund interest rate tracks interest rates in the U.S.,” Kim Weaver, director of External Affairs for the Federal Retirement Thrift Investment Board, the organization that manages the TSP, said in an email.

Treasury securities are traditionally one of the safest investments available. That’s because they’re guaranteed by the federal government; as long as the U.S. government exists, it will pay the interest.

But those interest rates have been falling for as long as the G fund has existed.

Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis
“Very simply put, interest rates as a whole have been going down very dramatically over the last — for the most part — 30 years,” Greg Klingler, director of wealth management for the Government Employees Benefit Association, said in an interview. “We saw some peaks in 2003. And then again, in 2006. But at the end of the day, the result of a lot of this quantitative easing and other things that the legislators have put into effect, and the Federal Reserve has put into effect, has been driving down the 10 year bond, among other things.”

There’s also the general economic uncertainty that’s been a fixture of the past few years. More people looking for “safe” investments means more people buying Treasury bonds, which raises the value and pushes down the returns.

“There appears to be a lot of money awash in the world looking for places to invest. And the United States is considered a very safe place to invest. So a lot of money comes into the United States to buy U.S. government bonds, because they’re considered 100% safe. And that lowers the interest rate below what it might normally be,” Stein said. “And, of course, since the COVID pandemic, the Federal Reserve has been more aggressive about pushing down interest rates than it’s ever been in history. And we’re seeing that, and that’s why the G fund return might be 50% lower this year than last year on an annual basis.”

In fact, interest rates have been pushed down so far that the yield curve has flattened, Klingler said. What that means is Treasury bonds that mature over longer periods of time aren’t seeing returns that are significantly higher than bonds that mature quickly. Normally, a 30 year bond would yield higher returns than a 10 year, which would be higher than a one year. Currently, rates are so low that there isn’t a significant difference.

So if both interest rates and the G fund returns are that low, where can they go from here? Can the trend reverse itself?

“When interest rates begin to rise, so will the G Fund interest rate. [The FRTIB] cannot predict when that might happen,” Weaver said.

No one else could predict it either, but Klingler and Stein aren’t particularly hopeful either.

“I’ve said it a couple of times over the years, thinking that we’ve hit our official bottom for interest rates. And there’s been a couple of times where, frankly, I have been wrong,” Klingler said. “You look at interest rates across the board, the 10 year Treasury, mortgage rates, and we are seeing historic lows. They can’t really go any lower than they’re currently going. But the question is will they go up? The Federal Reserve, our legislators, they’re using interest rates a lot more than they once did in order to maintain their fiscal and federal monetary policy. So with that being said, unless we see some major inflation, I would say that the idea that we’re going to see interest rates that we did back in the late 90s, or even the 80s, those probably would not be expected to happen.”

And that’s the point: Low interest rates are good for business, and make for strong financial markets. Strong financial markets are good for politics. That’s why, although interest rates have dropped significantly, the stock market keeps hitting record highs.

“Stock prices have increased over long periods of time. And they can continue to increase, they could increase forever. Interest rates are different,” Stein said. “The higher interest rates get, the more likely we are to have a recession. Which would cause interest rates to go down. So interest rates in the United States, this is pretty much the lowest they’ve ever been.”

And politicians have an interest in keeping it that way. But there are other ways they could affect the G fund’s returns as well.

“It’s interesting to note that our legislators, even as recently as the past three years, have tried to reduce the amount of money the G fund has been paying,” Klingler said. “The logic behind that is they say, ‘well, 10 Year Treasury bonds are paying this percentage, but I’m giving you a liquid rate that you don’t have to hold for 10 years. You don’t deserve a 10 year rate of return; you deserve a one year rate of return.’ If that were to go into effect that would actually drive the value of the G fund down further.”

What that means is instead of basing the G fund’s returns on 10 year bonds, they could base it instead on bonds that mature more quickly, which usually carry a lower rate.

That could hurt a lot of federal employees’ retirement prospects. But it would also hurt the government itself, Stein pointed out.

“The United States benefits from the G fund in this one way that occasionally when the government runs short of cash, like they don’t pass a continuing resolution, they borrow money from the G fund,” he said. “So there is an incentive to give a good return on the G fund, in my opinion, because they want a lot of money in there. It’s an emergency fund for them.”

And there is currently a lot of money in the G fund: a little more than $260 billion, in fact. That’s more than six times as much as is in the Fixed Income Index Investment F fund, which is also based on the bond market. Yet the F fund has outperformed the G fund for more than 10 years, Stein said. In fact, he added, the F fund has only posted a negative return three years out of the last 27. That makes it a pretty solid investment.

But the G fund’s reputation for being low risk is what draws the money, Stein said, regardless of whether it’s accurate or not.

“The only risk that you are taking care of by being in the G fund is volatility. It doesn’t fluctuate in value,” Stein said. “But a bigger risk for long term investors is purchasing power loss because of taxes and inflation. And that’s where the G fund and even the F fund do very poorly compared to the C and S funds. I don’t think it’s explained well. People say that the G fund is safer. But really the only way it’s safer is it’s less volatile.”

Because the G fund doesn’t even keep up with cost of living, which means federal employees who are heavily invested in the G fund are sacrificing purchasing power to avoid volatility.

Sitting in the G fund also won’t help federal employees recover from losses they suffer during an economic downturn. It may make them feel safer, but they’ll never make back their losses. That’s a lesson, Klingler said, many learned the hard way during the Great Recession. But they did learn, based on what he sees now.

“I think during this past downturn in 2020, at least from my perspective, a lot of people, they learned from their mistakes or the mistakes of their friends or family members. And this year, more than anything else, what I saw personally was people kind of hunker down and shelter in place and just didn’t want to do anything. So they didn’t move money out. They did not reallocate it, they just did not do anything,” Klingler said. “And for people who had good investment portfolios that were well diversified appropriately for their age, and their risk tolerance, those people did just fine. It’s the people who either were taking on too little risk or too much risk that suffered during that process.”

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