Thrift Savings Plan readies for new investment fund

The Federal Retirement Thrift Investment Board voted Monday to officially endorse a plan that would offer federal workers an automatically diversified retirement investment option.

Board members lined up strongly in support of the "life cycle" plan, which Gary Amelio, executive director of the Thrift Savings Plan, wants to offer early next year. The life cycle plan would be a collection of existing funds, automatically diversified and adjusted over time to account for each federal worker's investment preferences. A young worker, for example, could opt for a more aggressive investment strategy to increase potential returns. The program could automatically shift the investments to lower yield, lower risk funds as the worker grew closer to retirement.

Thrift board chairman Andrew Saul said the option is a "major move forward" for participants in the 401k-style TSP.

In an April 14 memo, Amelio said the plan was "the best way to provide professionally managed asset allocation to TSP participants, particularly those who do not have the time, knowledge or interest to actively manage their accounts."

The option will be voluntary, and TSP participants can choose to invest any percentage of their retirement assets in the plan. More than 3 million federal employees and retirees have more than $134 billion invested in the TSP.

The board set aside another investment option, the lifestyle fund, which would have arranged existing funds in a conservative, moderate or aggressive investment structure. According to the April 14 memo, TSP staff, board members, the Employees Thrift Advisory Council, congressional staff and Labor Department officials had agreed the life cycle funds "would be the better choice."

Monday's vote comes after repeated warnings from Amelio that TSP participants are not diversifying their investments efficiently and are potentially losing out on thousands of dollars in retirement savings. Amelio said also that some investors attempt to gain high yields by transferring their savings to better performing options. Those changes, however, usually come too late and investors end up missing valuable appreciation.

To launch the life cycle option, the Thrift Board will hire a contractor to develop the asset allocation program and a communications program to educate participants. A request for vendor proposals is expected by next month's TSP board meeting.

Board members and TSP staff said Monday that the communications program would be helpful in teaching TSP members about asset allocation, even if they decide not to join the life cycle plan. Because of the benefit of the education effort, the cost will be spread across all participants, according to Amelio.

"For simplicity's sake, for efficiency's sake, the cost of this project is going to be allocated across the plan," he said.

Amelio said that in a best-case projection, about 10 percent of TSP investors are expected to join the life cycle plan in its first five years. TSP staff said this is comparable to the industry standard.

Board members supported Amelio and said the plan was necessary to encourage participants to diversify. After reviewing TSP investment numbers, Thrift board member Alejandro Sanchez said the data backs Amelio's push for the life cycle funds.

"If there were any doubters out there," Sanchez said, "they're not doubting you anymore."

The 401(k)-style Thrift Savings Plan currently offers five funds: the C, F, G, S and I funds. The latter two were added to the plan in May 2001. The C Fund invests in stocks of large companies, the F Fund in bonds, the G Fund in government securities, the S Fund in small- and mid-size companies and the I Fund in international stocks.