Understanding Your TSP’s Investment Options

Among the many benefits of working in the Federal government is the Thrift Savings Plan (TSP). The TSP boasts fifteen broad-based investment options, including five individual funds (C, S, I, F, and G) and ten lifecycle funds. Although there is plenty of information available on the TSP’s funds, many Federal employees don’t understand the fund options or are unsure of which funds are appropriate for them. So, let’s examine each fund and why you might include them as you build your retirement portfolio.

The G Fund

The G Fund owns only short-term government securities, with your principal and interest guaranteed by the U.S. government, which means this investment is as close to risk-free as you will find. Thus, this fund has the lowest risk of the five funds and, as a consequence, the lowest expected rate of return of all five individual funds.

Why might you include this fund in your portfolio?

This fund can fill the same role as a money market or short-term bond fund by adding stability and liquidity to your portfolio. In other words, this fund will avoid the price fluctuations that the other funds will likely experience, allowing you to access your money when you need it.

What are the risks of this fund?

The significant risk of investing in the G fund is inflation risk. As mentioned, this fund has the lowest expected return of all funds, and therefore its long-term growth may not keep up with inflation. In other words, the money you pull out in retirement might not have the same purchasing power as it did when you contributed them to the G fund.

Past Performance *
2021 YTD: 0.40%
1 Yr: 0.97%
3 Yrs: 2.03%
5 Yrs: 2.05%
10 Yrs: 2.04%

The F Fund

In contrast to the G fund, the F Fund owns longer-term fixed-income securities, tracking an index that includes not only government bonds but also corporate, asset-backed, and foreign government bonds. Unlike the G fund, the F fund offers no guarantee of principal or interest; hence, exposing you to more risk but also offering a greater expected return.

Why might you include this fund in your portfolio?

Although you might include this fund due to it historically outperforming the G fund, the most significant reason for holding this bond fund is diversification. This diversification is critical because bonds often move inversely to stocks. For instance, during a steep stock market decline, bond prices tend to appreciate, helping offset the stock losses in the portfolio. This inverse relationship to the stock funds in your TSP can add stability and help smooth out the bumps on the way to meeting your retirement goal.

What are the risks of this fund?

Like the G fund, the F fund also exposes you to the risk of inflation. However, unlike the G fund, the F fund is subject to some price fluctuations, meaning you will not be shielded from market volatility and can lose money.

Past Performance*
2021 YTD: -2.55%
1 Yr: 7.50%
3 Yrs: 5.38%
5 Yrs: 4.57%
10 Yrs: 4.07%

The C Fund

The TSP has three stock funds, with the C fund being the most conservative. The fund tracks the S&P 500 Index, which is composed of the 500 largest companies in the United States. This fund has experienced greater volatility than either the G or F Funds, along with higher returns over time.

Why might you include this fund in your portfolio?

The main reason to include the C fund in your portfolio is that stocks tend to produce greater investment returns than bonds in the long term. Historically, stocks have achieved a return between 7-9% over the long term; typically, outpacing inflation by a comfortable margin. Hence, for growth-oriented investors, the C fund typically holds the largest percentage of the portfolio.

What are the risks of this fund?

Because the C fund tracks the stocks in the S&P 500 Index, it is subject to the same volatility. Meaning the C fund will experience the ups and downs of the stock market, which can be quite dramatic. Another important consideration is that since the S&P is market-capitalization-weighted (gives more weight to larger companies), the index has a concentration of larger companies. For instance, although there are 500 companies in the index, the top 6 companies make up about 20% of the value of the index. This lack of diversification adds additional company-specific risk to the C fund.

S&P 500 Top 6 Holdings and Weight
Apple 5.86%
Microsoft 5.37%
Amazon 4.19%
Facebook 2.21%
Alphabet 2.00%
Alphabet (Google) 1.96%

(Source: Yahoo Finance)

Past Performance*
2021 YTD: 12.61%
1 Yr: 18.31%
3 Yrs: 14.13%
5 Yrs: 15.20%
10 Yrs: 13.90%

The S Fund

Like the C fund, the S fund provides exposure to the U.S. stock market. However, the S fund is the TSP’s small and mid-capitalization fund designed to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, which consists of more than 3000 companies.

Why might you include this fund in your portfolio?

There are two main reasons why you might include the S fund in your portfolio. The first is that since the fund comprises smaller, less established companies, it has greater growth potential. Secondly, since the S fund tracks an index of smaller companies not included in the S&P 500, adding the fund improves your portfolio’s diversification.

What are the risks of this fund?

Similar to the C fund, the S fund is subject to the volatility of the stock market. However, since the S fund comprises smaller, less established companies, it generally experiences more price fluctuations than the C fund.

Past Performance*
2021 YTD: 11.60%
1 Yr: 31.85%
3 Yrs: 15.25%
5 Yrs: 16.06%
10 Yrs: 13.32%

The I Fund

The I Fund invests in international stocks in nearly two dozen countries that make up the developed markets of Europe, Asia, and the Far East. The fund tracks the MSCI EAFE Index, which is composed of larger companies in 21 developed countries. The I fund is the only fund that provides exposure to companies outside the United States.

Why might you include this fund in your portfolio?

The main reason why you might include this fund in your portfolio is for the added diversification. Since this fund is the only fund that provides exposure to companies outside the U.S. and Canada, the I fund can improve your portfolio’s diversification.

What are the risks of this fund?

Like the C and S funds, the I fund is subject to market volatility and inflation risk. Additionally, since the I fund comprises non-U.S. companies, it is also exposed to currency risk. Lastly, the MSCI EAFE Index has limited country diversification, with a heavy concentration in Western Europe and Japan. For instance, of the over 900 large and medium-sized companies included, more than 20% of the companies are in Japan, and nearly 15% are in the U.K. This concentration in a few developed countries exposes investors to increased country-specific risk.

Past Performance*
2021 YTD: 10.58%
1 Yr: 8.17%
3 Yrs: 4.68%
5 Yrs: 7.99%
10 Yrs: 5.87%

The L Funds

Lastly, the L Funds are equivalent to target-date funds. The funds allow you to pick one of ten different target dates corresponding to your desired retirement date. As the target date of the fund (your retirement date) nears, the percentage of stocks will gradually decrease while the percentage of bonds increases. This gradual change in allocation reduces your portfolio’s risk as you near retirement. Currently, the L Fund options are 2025, 2030, 2035, 2040, 2045, 2050, 2055, 2060, and 2065, as well as a current-income fund for those already taking withdrawals.

Why might you include this fund in your portfolio?

The L funds might be a fit for you if you don’t have the knowledge nor the inclination to learn how to manage your retirement portfolio. Because the L funds are designed and managed by portfolio managers, they are an efficient and effective option for investing your retirement funds in a diversified portfolio.

What are the risks of this fund?

Although the L funds can be a great option for many Federal employees, they come with a significant drawback. The major drawback is that they are a one-size-fits-all option, meaning they do not consider your unique circumstances. For instance, the L funds don’t consider your risk tolerance nor your required rate of return. Hence, the L funds allocation might be too conservative or risky for some investors (although the allocations tend to lean conservative).

Final Thoughts

Although the TSP’s investment selections are limited, they offer participants the options of growth, income, and capital preservation. Whether you decide to build a custom portfolio from the five individual funds or prefer the autopilot style of the L funds, it’s imperative that you establish an investment plan that fits your risk tolerance and goals. If you’re not confident in creating your investment plan or would like an expert opinion, consult with a qualified financial planner.

Sources*: TSP.gov, Yahoo Finance


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Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Jose Armenta is a CERTIFIED FINANCIAL PLANNER professional who specializes in helping federal employees get the most out of their federal benefits. Jose's experience serving federal employees provides him with valuable insight into the unique financial planning needs of federal employees.