As a workplace retirement savings vehicle for U.S. federal civilian workers and members of the uniformed services, the Federal Retirement Savings Plan is the largest defined contribution plan not only in the United States but in the world. Its more than 6.7 million members include most US government employees, such as postal workers, military personnel, agency employees and members of Congress.
Like most U.S. retirement savings plans, target date strategies are an important and growing component of the TSP. These are known as life cycle or L funds, and more than half of the 6.7 million TSP participants have directed at least some of their assets to these target-date funds; of these, 2.3 million workers invest solely in the L funds. To offer a measure of independent analysis of L fund investors and the advisors who serve them, Morningstar viewed the L funds through a lens similar to that used to examine investment strategies for target dates available to the general public by researching funds process, People, price, parent and performance.
Here we explore the main pros and cons of TSP L funds. Let us know if there are any other TSP-related questions you’d like us to cover in the future.
Thrift Savings Plan L Fund Advantages:
- Rigorous annual testing of the asset allocation sliding path.
- Access to Fund G, which provides US government-guaranteed risk-free returns in the bond market
- The underlying funds rely on respected managers through BlackRock and State Street Global Advisors.
- Access to Fund G, which provides US government-guaranteed risk-free returns in the bond market.
- Among the lowest expense ratios available to investors.
- Unmatched level of transparency through board meetings and various reports available to the public.
- The returns are fully in line with expectations, protecting in down markets.
- Long-term results consistently outperform competitors.
Thrift Savings Plan L Fund Disadvantages:
- Excruciatingly slow implementation of investment decisions.
- Commonly used non-US subset classes are missing.
- Concentration risk is somewhat mitigated, but still heavily reliant on BlackRock.
- Transparency around TSP glide path management and investment staff could be better.
- Fees would probably be cheaper.
- Evidence of superficial supervision does not inspire confidence.
- Politics influences oversight and decisions.
- A heavy bond allocation hinders participation in bull markets.
Low fees boosted returns on Thrift Savings Plan L funds
Investors in the L Fund have experienced the benefits and burdens that come with investing through the US government in the world’s largest retirement savings plan. They enjoy significant advantages: TSP’s size gives it great negotiating power with BlackRock and State Street Global Advisors, two respected firms that manage the plan’s index-based funds. And while we’d like administrative fees to decrease as account balances grow, L Fund’s fees are still among the lowest in the nation.
TSP savers and L Fund users also benefit from the Government Securities Investment Fund, or G Fund, which boasts a combination of a US government guarantee, access to market interest rates and price stability. The G Fund “provides high yield while eliminating bond market risk” through a dedicated treasury created exclusively for TSP; taken together, these are features that cannot be accessed or replicated outside of this plan. The low fees plus the G Fund have boosted the recent returns of the L Funds, as shown in Exhibit 1.
Thrift Savings Plan L Fund held back by extremely slow rollout
Yet size and government are also sources of fund weaknesses; in particular, the marked slowness to implement recommended improvements plus political considerations impede federal workers’ retirement readiness in ways that rarely affect private sector workers to the same degree.
Changes to the funds’ equity asset allocation sliding path have been phased in over a nearly 15-year period, a process that ready-made target-date strategies routinely complete in months. A glide path is one of the key features of a target date strategy and should reflect management’s best thinking. Exhibit 2 shows the current slide path of L Funds’ asset allocation, the expected smoothness to be reached in 2032, and the average smoothness for the industry.
Meanwhile, the funds’ long-standing plans to diversify into emerging markets have run into multiple obstacles. Although TSP investment experts continued to recommend the change, U.S. senators introduced legislation and board members from TSP’s governing body, the Federal Retirement Savings Investment Board, passed proposals that stalled those efforts; they cite national security and other justifications that few private sector plans consider in their fiduciary oversight. Unique to the TSP, the FRTIB must regularly lobby and lobby Congress to budget and monitor legislation directly targeting the TSP.
Ultimately, there is much to recommend the TSP L funds, but there is also the potential for better outcomes from the 6.7 million workers served by the TSP. To go from good to great, follow investment experts, act with more urgency, and take full advantage of the scale and negotiating power that comes from managing the world’s largest pension plan.