Breaking Down the TSP Investment Funds

The Thrift Savings Plan (TSP) offered to all U.S. government employees is one of the simplest and most efficient retirement plans in use today. But while thousands of civilian and military employees defer a portion of their earnings into the plan each year, many participants do not understand the actual fund options available or are unsure which funds are appropriate for them. This article breaks down the five core investment funds available in the TSP along with the Lifecycle funds and their proper use.

The five core funds offered in the Thrift Savings Plan loosely cover the basic range of publicly traded debt and equity securities. All five funds are managed by Blackrock Capital Advisers and are available only to TSP participants. None of them trade on any public exchange, although Blackrock does offer publicly traded equivalents of some TSP funds through iShares, its subsidiary company that offers a comprehensive range of ETFs.

Four of the five funds are index funds, which hold securities exactly matching a broad market index. The money participants place in the F and C Funds is invested in separate accounts, while the S and I Fund monies are invested in trust funds commingled with other tax-exempt pension and endowment funds. All of the funds, except for the G Fund, are 100% invested in their respective indexes, and they do not take into account the current or overall performance of either the specific index or the economy as a whole. Each TSP fund's share price is calculated daily and reflects investment returns minus administrative and trading costs. The five funds are broken down as follows:

This is the only core fund that does not invest in an index. The G Fund invests in a special nonmarketable treasury security issued specifically for the TSP by the U.S. government. This fund is the only one in the TSP that guarantees the return of the investor’s principal. It therefore has the lowest risk of the five funds, and all money contributed into the TSP is placed into this fund by default unless the participant specifies otherwise. It pays an interest rate based on the current market yield of all outstanding publicly traded treasury securities with a maturity of at least four years. The average maturity is about 11 years, and the aggregate interest rate is adjusted monthly.

The G Fund has historically provided the lowest rate of return of any of the core funds. The Barclays iShares funds matching the G Fund most closely are the iShares Barclays 7-10 year T-Bond fund (ARCA:IEF) with an average maturity of 8.38 years, and the 10-20 year T-Bond fund (ARCA:TLH), which has an average maturity of 14.36 years. 

This fund represents the next step up the risk/reward ladder in the TSP. The F Fund purchases securities that exactly match the Barclays Capital U.S. Aggregate Bond Index. This index invests in a wide range of debt instruments, including publicly traded treasury and government agency securities, corporate and foreign bonds, and mortgage-backed securities (MBS). This fund also pays monthly interest typically exceeding that paid by the G Fund. However, it does not guarantee the return of the investor’s principal. The Barclays iShares equivalent ETF is the iShares Core Total U.S. Bond Market ETF (ARCA:AGG).

This fund is the most conservative of the three stock funds available in the TSP. The C Fund invests in the 500 large and mid-cap companies that comprise the Standard and Poor’s 500 Index. This fund has experienced greater volatility than either the G or F Funds and has posted commensurately higher returns over time. The Barclays iShares equivalent ETF is the iShares Core S&P 500 (ARCA:IVV).

The S Fund holds the same securities as the Dow Jones U.S. Completion Total Stock Market Index. This index is composed of the 4,500 companies outside of the Standard & Poor’s 500 Index that make up the rest of the Wilshire 5000 Index, the broadest of the stock indexes. As the fund name indicates, these companies are smaller and less established than the S&P 500 companies and have greater potential for growth than those in the C Fund. The S Fund is considered one of two funds with the greatest risk in the TSP. It has outperformed the C Fund with proportionately greater volatility over time.

Barclays iShares has no exact S Fund equivalents. Those who wish to duplicate this fund outside the TSP could use the following four funds to cover many of the companies in the S Fund (and some that are not):

Russell Midcap ETF (ARCA:IWR)
Russell 2000 Index ETF (small caps only) (ARCA:IWM)
I Total ETF (ARCA:ITOT)
Russell 3000 ETF (ARCA:IWV)

This fund invests in securities mirroring the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. This is one of the broader international indexes investing in larger, more established companies located in 22 developed countries around the world. It is regarded as the other high-risk fund in the TSP and has historically posted a higher average annual return than the C Fund. This is the only fund in the TSP investing in companies outside the U.S. The Barclays iShares equivalent ETF is the iShares MSCI Europe, Australasia and Far East ETF (ticker symbol EFA).

The Lifecycle funds are composite funds that invest in a combination of the five core funds and act like target date funds by nature. They are designed and managed by the portfolio managers at Blackrock Capital and function as "automatic pilot" funds for participants who do not wish to make their own asset allocations. They invest primarily in the stock funds when they are issued, and are then slowly reallocated by the fund managers into the two bond funds every 90 days until they mature. The fund's asset allocations include 74% invested in the bond funds, and the remaining 26% is divided between the three stock funds.

Participants should take care to match the maturity date of the L Fund they choose with the time they actually begin receiving distributions, instead of when they merely separate from government service. Each is designed to provide income for those who will begin taking distributions within five years of the maturity date, and they also offer the best possible mix of growth versus reward during both the growth and income phases of each fund. The L Income Fund can be used by those who have already retired and need a conservative stream of income at the present time. 

Although the L Funds provide one avenue of professional portfolio management for TSP participants, some privately managed TSP investment programs may provide additional clout for aggressive investors. Tsptalk.com offers several levels of market-timing strategies, and TSPCenter.com provides additional commentary and ideas. Those who seek higher returns and are willing to take on additional risk can search online for other proprietary market-timing strategies that may beat the indexes over time. Of course, many of these programs charge a quarterly or annual fee for their services, and they cannot guarantee their results.

The Thrift Savings Plan offers participants the options of growth, income and capital preservation. The annual investment expenses in this plan are among the lowest in the industry and all of the funds are fully transparent. There are no hidden fees in this plan, and participants should think carefully before rolling their plan assets elsewhere when they retire.