Meet the S fund

Financial planners often tout the importance of diversifying your investment portfolio. Rather than invest all of your retirement money in one place, you should invest in several places, the planners say. In the average private-sector 401k plan, employees have more than 11 investment options, the Profit Sharing and 401k Council of America reported last year. Most of those options are stock funds. The federal Thrift Savings Plan, the government's 401k-style program, has three options, only one of which is a stock fund (the C Fund, which invests in common stocks and tracks the S&P 500 index). Beginning in May, federal workers will have two more stock investment options, the I Fund, which Pay and Benefits Watch described last week (Meet the I Fund), and the S Fund. The S Fund will invest in small- and mid-sized companies' stocks. It will track the Wilshire 4500, an index that follows the performance of--despite its name--6,200 firms. It includes stocks that are not included in the S&P 500. The S&P 500 follows the performance of 500 major American companies; the Wilshire 4500 includes everything else. The Federal Retirement Thrift Investment Board, which manages the TSP, explains the S Fund this way: "Although the S Fund will be diversified among industries and companies, losses will occur if and as the value of the Wilshire 4500 index declines in response to changes in overall economic conditions. The Wilshire 4500 index returns tend to fluctuate more than S&P 500 index returns because the prices of the stocks of the smaller companies in the Wilshire 4500 index tend to react more strongly (positively and negatively) to changes in the economy. Therefore, S Fund investments are expected to be more volatile than C Fund investments." The table below shows the Wilshire 4500's performance in comparison to the C Fund's performance.