GovernmentExecutive.com

On Aug. 1, the Thrift Savings Plan will celebrate the one-year anniversary of its newest investment offering: the life-cycle (L) funds.

The L funds are a blend of the five basic TSP funds -- international stocks, small and large domestic stocks, government securities and fixed-income bonds -- that automatically shift participants' money from a mix of riskier to more conservative investments as they age.

About 330,000 participants grabbed onto the L funds idea, pouring almost $12 billion into the funds. About 7 percent of employees in the older Civil Service Retirement System participated, along with 9 percent of those in the Federal Employees Retirement System -- which relies more heavily on the TSP for retirement savings.

TSP Executive Director Gary Amelio said those numbers have "simply blown the doors off of our wildest expectations."

So far, the 330,000 employees in the life-cycle offering have made a wise choice. Since their inception, all of the L funds have outperformed both the government securities (G) fund and the common stocks (C) fund, where the bulk of TSP participants' money is invested.

The L 2040 fund, which is designed for participants with an expected retirement date around the year 2040, had an 8.98 percent rate of return since its inception. The L 2030 fund had an 8.28 percent return. The L 2020 earned 7.77 percent, the L 2010 6.93 percent and the L Income, designed for employees with planned retirements in the very near future, had a 5 percent rate of return.

By comparison, the G Fund posted a 4.38 percent return in the same period, and the C Fund gained 4.59 percent.

Of course, the L funds' mix of conservative investments to counterbalance more volatile funds means they won't likely reach the heights of successful risky investments.

International stocks posted a 22.10 percent return since last Aug. 1. Even the riskiest L fund, L 2040, puts only 25 percent of its money into the I Fund.

The I Fund has been up and down, though, earning 4.83 percent in April and then losing 3.87 percent in May, for example. Some participants have been chasing the I Fund's returns, pulling out of it when it loses money and then reallocating money into the fund on the upswing.

The TSP's board and staff have warned participants against such tactics. In June alone, there was almost a $4 million trading cost on the I Fund because of about 215,000 such chasers.

"Because of the volatility in the markets, a lot of the participants panicked and kept pulling the trigger," said Tracey Ray, the TSP's chief investment officer.

"That's what these L funds are intended to prevent," Amelio said.

Investing in the L funds takes the trigger out of employees' hands, for better or for worse, and puts them on a longer-term investment horizon.

COMMENTS

• As a manager, Ray should be concerned primarily about keeping costs low. Thank you for that. Still, the TSP participants’ primary concern is about maximizing their resources -- an entirely understandable sentiment. While I normally never recommend “chasing” a stock fund's performance because of the time lag in reaction versus action, I now wish I had had the foresight to have done that. Ultimately, whenever dealing with stocks or stock funds, the entire object is to buy low and sell high. I will not address the dollar cost averaging theory because if you truly look at it, that only matters when you purchase and when you sell. Where you hold the stocks is what is involved in sunk fund(s) maneuvering. The optimum action for the individual participant would have been to transfer all his or her stock funds to the G Fund (and even that bothers me) on May 10 and then back to the stock funds on June 13, while maintaining or exceeding current rate of purchase in said stock funds. But then, the old adage reminds us that “hindsight is golden.” Well, enough for theory. What I really have a problem with is the fund cost figures. If the cost of the transfers equaled or exceeded $4 million for only 215,000 participants, that averages $18 per person. I’m wondering, how much was that per transaction and is that a good or bad rate? Perhaps instead of limits per year, as Rick suggested, we should subtract the transaction fee from the transaction itself? That would make participants weigh their actions more closely. Additionally, if that were so, wouldn’t the L funds have to support themselves? I would be more open to even the REIT fund then. Tip off. Tip Posted July 26, 2006 1:33 PM
• The article says there were $4 million in trading costs by traders chasing the I Fund. Does this cost me anything as a buy and holder? If so, it is time to establish limits on the number of trades allowed per year, a certain amount of time between trades, fees for trading, etc. The TSP is for retirement and my funds should not be degraded by having to pay for trades by clowns who think they are smarter than Warren Buffett! The addition of these limits will also protect the traders from themselves. Rick Westmoreland Posted July 25, 2006 7:53 AM