Tommy Blackburn, CFP®, CPA, PFS

John Mason, CFP®

Thrift Savings Plan L (Lifecycle) Fund Updates

The Federal Thrift Savings Plan (TSP) is unveiling new fund options on July 1, 2020. The addition of the new funds will coincide with the termination of the L 2020.

Background

The Life Cycle Funds (L Funds) are made up of the underlying “core” TSP funds:

• The Common Stock Index Investment Fund (C- Fund). This fund consists of stocks of large and medium-sized U.S. companies and tracks the S&P 500 Stock Index.
   
• The Small Capitalization Stock Index Investment Fund (S-Fund) - This fund consists of stocks of small to medium-sized U.S. companies (not included in the C Fund) and tracks the Dow Jones U.S. Completion Index.
   
• International Stock Index Investment Fund (I- Fund) - The I-Fund tracks the MSCI EAFE Index.
   
• The Government Securities Investment Fund (G-Fund) –The G Fund is invested in short-term U.S. Treasury securities that are specially issued to the TSP.
   
• The Fixed Income Index Investment Fund (F-Fund) - This fund tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

There are currently five L Funds available:

1. L-Income
2. L 2020
3. L 2030
4. L 2040
5. L 2050

The L Funds are target date retirement funds similar to what is available in private sector 401(k) and 403(b) plans. The underlying core funds are weighted and adjusted on a quarterly basis and the risk or stock allocation is a factor of the amount of time until the “target” retirement date.  For example, the L 2050 is the most aggressive L Fund available and has a stock exposure of 82% with the remaining 18% in bonds or fixed income.  The idea is that someone with a target retirement date of 2050 has 30 years before the funds will be used to generate retirement income. Therefore, a person with an L 2050 allocation can be more aggressive.  The longer term nature of the investments provides for more years of growth as well as more years to recover from a market decline.

As time progresses, the L Funds become more conservative.  The stock exposure will decline and the bond exposure will increase.  In 2050 barring substantial changes, the L 2050 fund will essentially mirror the current L2020 fund which consists of 77% bonds and 23% stocks.  These changes are made regardless of market conditions and without regard to one’s individual financial plan. While it may generally be prudent to reduce risk as one approaches retirement, we don’t believe in an arbitrary asset allocation that is adjusted irrespective of one’s financial plan and individual goals.  Although we have recommended the use of the L Funds since their inception, we review the underlying stock/bond weightings frequently to ensure that the allocations are appropriate and coordinate with the other strategies established in our clients’ financial plans.

Sayonara L 2020 Fund

The L 2020 fund has reached its target year which will result in its retirement on July 1, 2020 and removal from the L Fund lineup.  All participants currently invested in the L 2020 will automatically be invested in the L-Income Fund.  The L-Income fund consists of 78% Bonds and 22% stocks which is only slightly more conservative than the current L-2020.  No action is required if the L-Income asset allocation fits your plan.  Although the low stock exposure will produce lower volatility, it will also likely produce lower returns over time.   While lower volatility may be your goal, the L-Income Fund may not be the appropriate or required asset allocation for you that results in a successful financial plan.

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Welcome the New L Funds

Along with the retirement of the L 2020 comes the birth of five year increment L-Funds.  Typically, we would expect to see the L 2060 Fund rise from the ashes of the L 2020 to reflect the natural passage of time and become the most aggressive L Fund available.  However, in addition to the expected L 2060 Fund, the Thrift Savings Plan created the following funds that will be available beginning July 1, 2020:

1. L 2025
2. L 2035
3. L 2045
4. L 2055
5. L 2065

These funds are in addition to the current L fund lineup with a goal to make it more convenient for TSP participants to select an “appropriate” allocation for those with a target retirement date somewhere in between the 10 year increments. Previously, a target 2045 allocation could be achieved by allocating 50% of a participant’s TSP to the L 2040 and 50% to the L2050. Out of curiosity, we question the amount of money and resources allocated to the creation of something that basically already existed.

Good Tools, but not an Individually Tailored Investment Plan

The L Funds, and their new fund additions are good tools.  However, they are exactly that, a tool and not a replacement for an individually customized investment and financial plan. The L funds are useful, specifically for those individuals early in their career with limited investment experience. The underlying asset allocation must be reviewed and must coordinate into one’s individual financial plan.  For example, an allocation of 78% bonds is likely not appropriate for an O-6 retiring in 2020 who has 40 or 50 years of investment time horizon.  Similarly, an allocation of 78% bonds may also be inappropriate for a GS employee who is retiring in their mid 60’s, who is in excellent health and who has a goal of generating substantial income from investments for 35 to 40 years.  What is the goal, and what is the purpose of this money?  A proper investment plan should coordinate with a comprehensive financial plan. The financial plan will establish the appropriate mix of the TSP Core Funds or an allocation to a specific L Fund.  Further, a comprehensive financial plan will answer what is arguably the more critical question of whether one’s contributions should be Pre-Tax, Roth or a combination.

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Source: Summary of the Thrift Savings Plan