Life Investment

Participation in the TSP's newest fund offering has more than doubled since 2005.

On Aug. 1, the Thrift Savings Plan will celebrate the three-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 higher risk to more conservative investments as they age.

About 600,000 of the plan's 3.9 million participants are investing in the L funds, up from almost 215,000 at the end of 2005 when participation was first measured. Participants have poured almost $23.6 billion into the funds. About 11 percent of employees in the Civil Service Retirement System participate, along with 15 percent of those in the Federal Employees Retirement System -- which relies more on the TSP for retirement savings.

So far, investing in the L funds has been a wise choice. Since their inception, all 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 Income Fund, designed for employees with planned retirements in the very near future, has outperformed the G Fund by 35 basis points annually.

The L 2040 Fund, which is designed for participants with an expected retirement date around the year 2040, had a 6.18 percent rate of return since its 2005 inception. The L 2030 Fund had a 5.98 percent return. The L 2020 earned 5.94 percent, while the L 2010 6.02 percent and the L Income had a 4.99 percent rate of return since its creation.

By comparison, the G Fund posted a 4.64 percent return in the same period and the C Fund gained 3.22 percent.

Recent market volatility, however, has made it a tough year for the L funds. At a monthly meeting of the Federal Retirement Thrift Investment Board last week, officials said the L funds experienced their worst month yet in June. The same could be said for the year-to-date performance of the funds -- which have ranged from a loss of 0.67 percent for the L Income Fund to a loss of 8.39 percent for the L 2040 Fund.

Moving Out

Meanwhile, you may have noticed some recent advertisements encouraging you to move your retirement savings out of the TSP and into private sector 401(k) plans or Individual Retirement Accounts. But Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, is urging federal employees and retirees to ignore such claims.

In July 15 letters to TIAA-CREF and Fidelity, the two companies running the advertisements, Kohl called the campaigns "a disservice to hard-working public servants," and urged the companies to pull the ads.

"With consumer education as a priority, I have become increasingly concerned by advertisements promoting rollovers that are misleading or do not provide consumers with all the facts," Kohl wrote.

At a July 16 hearing before the Aging Committee, Gregory Long, executive director of the TSP, expressed concern over the ads. "People who leave the federal service are welcome to leave their retirement funds with us," he said, "and we actually encourage them to do so because the TSP has one very big advantage over virtually all private sector plans [and] that is a tremendously attractive fee structure."

Long also said that in 2007, the TSP accepted more than $478 million in funds being rolled over into the plan from private sector 401(k) and IRA accounts.

Kohl said his concern with the ads stems from the high, and often hidden, fees many private sector plans charge their participants, which can significantly reduce the amount of savings Americans have when they retire. In October 2007, Kohl and Sen. Tom Harkin, D-Iowa, introduced legislation that would require 401(k) plan providers to disclose all fees so workers saving for retirement can make informed decisions about which plan is right for them.

TIAA-CREF responded to Kohl's letter on July 16, agreeing to stop circulating the advertisements. But Fidelity indicated in a July 26 letter that it would continue the ad campaign, which characterizes TSP accounts as "old" and encourages participants to roll over into a Fidelity IRA.

Long said at the hearing that the TSP was "still young and vigorous" even after 21 years, largely because of its tracking of broad market performance while adding value for participants via low administrative expenses.

"Participants who would like to transfer their retirement savings from the TSP to an IRA are welcome to do so," he said. "But no one should move their funds from the TSP out of a concern that the TSP is old or retired."