Just weeks after new federal employees began placing their retirement savings into lifecycle funds by default, the board that governs the plans approved changes to how it allocates investments in the Thrift Savings Plan’s L funds.
Each year, the TSP looks at the allocations for its five lifecycle funds — L2050, L2040, L2030, L2020 and L income fund. The last fund is the one is covering current retirees.
“Every year, we look at them to make sure that asset allocation that we’ve designed is performing in the way that we want it to perform,” Kim Weaver, director of external affairs at the Federal Retirement Thrift Investment Board, toldIn Depth with Francis Rose Oct. 27. “What we’ve determined is given the way interest rates have been remarkably low, we’re going to change some allocations, move it a little bit more to the G fund, a little less on the F fund, a little less on the S fund and a little higher on the I fund.”
The L funds are built on the five underlying funds of the TSP, which are: the G fund (government securities); the F fund (corporate bonds); the C fund (S&P 500); the S fund (remainder of domestic stocks in the U.S.); and the I fund (international developed stock).
“What the lifecycle funds do is take those underlying five funds and over a period of time reallocates them,” Weaver said. “So, if you’re a new employee, you’re age 22, you’d pick our lifecycle or our L 2050 fund, because you won’t need that money from your TSP account until 2050 or beyond.”
Every quarter, the TSP reallocates that money automatically. Over time, it becomes less dependent on stocks and more dependent on the G fund and the bonds, which are safer investments for those nearing retirement.
“We’re looking to make the rate of return for the L fund provide you with a 70-80 percent replacement rate when you retire,” she said. “In other words, if you add up those three components, your FERS defined benefit, your Social Security and whatever you’re taking out of the TSP, you’re replacing 70-80 percent of your income. We’re designing to hit that target. You can do that being relatively conservative and protecting your capital, which is what we’re trying to do.”
At Tuesday’s meeting, the TSP board approved the recommended changes in L fund allocations. The changes need congressional approval before they are enacted.
Some board members asked if it would make more sense to be more aggressive in allocating the L funds, in order to provide more than the 70-80 percent target for retirees.
“On the upside, obviously, if you have more in stocks, you can maybe get a higher return,” Weaver said. “But, as you get closer to retirement, you would also possibly be in danger of losing that capital … which is not good for the person’s retirement. It’s not something we’re taking any look at. It has no bearing on the asset allocation we’re doing now. But we will look at it and see whether it is worthwhile pursuing.”
Weaver said L fund participants aren’t going to notice the change in allocations.
In 2010, the TSP began auto-enrolling new federal employees in the G Fund at a 3 percent contribution rate. As of Sept. 5, the default investment fund for civilian employees who are newly enrolled in the TSP is the age-appropriate L fund.
“What we found over the past several years is that there’s about 25 percent of the people who were auto-enrolled under the G fund, who were sitting and staying in the G fund,” she said. “And while the G fund is very safe, you’re not going to lose money in it, you also probably aren’t getting the return you’re going to need over the longterm to provide that replacement rate.”
The TSP successfully lobbied Congress to change the default investment fund to the lifecycle fund so employees would have greater diversity and a more reasonable rate of return.
“What that means if you’re a new employee and you’re 50, you’re going to be in the L 2020 fund,” Weaver said. “If you’re a new employee and you’re 21, you’re going to be in the L 2050 fund. We’re not just putting everyone in the same fund, we’re looking at their birthdate and putting them in the age-appropriate fund.”
Weaver added that while the new legislation doesn’t allow her office to switch current employees sitting in the G fund by default, they are bombarding those employees with information explaining why it would be beneficial to switch to a more appropriate fund.