Senate Approves Bill to Default New Hires Into Riskier, Higher Yielding TSP Fund


The Senate passed a measure to invest new federal employees’ retirement savings into lifecycle funds rather than government securities.

The Smart Savings Act, endorsed by the Thrift Savings Plan’s governing board and its stakeholders, would change the default fund for new hires from the low-yielding-but-steady G Fund to the higher risk, higher reward age appropriate L Fund. The House has already approved identical language, but for procedural reasons one body will have to formally approve the other’s legislation before the bill can be sent to President Obama’s desk.

New federal hires have been automatically enrolled in the G fund since August 2010, following the passage of the 2009 TSP Enhancement Act. New employees are defaulted to allocate 3 percent of their basic pay to the fund, unless they choose to end their contributions or change the amount or allocation. Participants also receive a 3 percent agency match, unless they opt out of automatic enrollment. The G fund is the most stable investment of the TSP’s options, while the L funds are a mix of the TSP’s government securities, fixed income bonds, common stock, small cap stock and international stock offerings, and are crafted to help yield higher returns through diversity.

Lifecycle funds are designed to move enrollees to less risky investments as they near retirement.

The legislation would only apply to new federal employees who are auto-enrolled in the TSP. It will not affect TSP participants who are currently auto-enrolled. The G Fund would continue to be the default enrollment for service members under the bill.

The Federal Retirement Thrift Investment Board, which administers the TSP, last year requested legislation to switch the default fund from the G Fund to the lifecycle funds. The Employee Thrift Advisory Council, which advises the TSP board on investment policies and the plan’s administration, endorsed the legislative proposal in November after initially opposing it. The council is made up of representatives from employee organizations, unions and the uniformed services.

The Thrift Board has found that while automatic enrollment has increased TSP participation, new government hires under the age of 29 have too much money invested in the G Fund—likely a result of auto-enrollment’s G Fund default option. The government securities offering is traditionally stable, but does not yield very high returns, so enrollees are leaving money on the table.

In the past 12 months, the most long-range lifecycle fund, the L 2050, has yielded a return of nearly 20 percent, while the G fund has yielded just 2.3 percent.

In a move that could perhaps put some detractors of the switch at ease, the Thrift Board announced last year that lifecycle funds would allocate a larger proportion of their total configuration to the G Fund. The board contracted a consulting firm to review its lifecycle fund allocations and opted to make the change in light of the findings.

(Image via Nomad_Soul/

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