in the Thrift Savings Plan
for Federal Employees
Beginning August 1, 2005, the TSP is offering L funds, or “lifecycle funds.” Lifecycle funds are “target asset allocation funds.” These L funds have a mix of investments of different types and characteristics, such as domestic stocks, international stocks, and bonds. The mix is chosen based on the date when you will need to use your money. If that date is a long time from now, the lifecycle fund in which you are invested will be more heavily weighted toward equities (stocks or stock funds). As the date you will need your money gets nearer, the allocation will be weighted more heavily toward fixed income or stable value investments (e.g., bonds or bond funds, Treasury securities).
The assumption underlying lifecycle funds "L funds" is that participants with longer time horizons for investment are both willing and able to tolerate more risk (up and down swings in an investment portfolio) while seeking higher rates of return. A further assumption is that as participants approach the time when they will begin to withdraw their assets from the Plan, their portfolios should be adjusted to reflect a lower tolerance for risk. Thus, a young person who is many years from retirement would invest in a lifecycle fund containing investments with higher risk and higher potential returns (such as stocks), and less in low-risk, lower-return investments (such as Government securities). The investments in each fund would adjust gradually and automatically to low risk portfolios as the fund's time horizon approaches. This process is referred to as asset reallocation.
Studies have shown that many 401(k) participants do not have the time, interest, or experience to manage their accounts. As a result, they may take too much risk for the returns they receive. They could either achieve better returns with the same amount of risk, or they could receive the same return with less risk. Our analysis of the data shows that some TSP participants appear to either be “chasing” the latest returns or leaving their accounts unattended altogether, never adjusting the allocation of their portfolios. Some participants leave their entire account in the most conservative fund, the G Fund, when they may need the higher potential returns of the other funds to give them the retirement income they want.The evidence therefore suggests that many TSP participants could benefit from the professional asset allocation offered by the lifecycle funds
The TSP lifecycle funds will invest only in the five funds currently offered by the TSP. We will not be adding new funds or asset classes. Thus, the lifecycle funds will be composed of various percentages of the G, F, C, S, and I Fund assets. The C, S, and I Funds will provide exposure to domestic and international equities, while the G and F Funds will provide fixed income and stable value investments.
The TSP decided to offer five lifecycle funds, collectively referred to as the “L Funds:
• L 2040, with a horizon date of 2040
• L 2030, with a horizon date of 2030
• L 2020, with a horizon date of 2020
• L 2010, with a horizon date of 2010
• L Income, for participants who are already withdrawing their money or who are just about to begin withdrawal.
Beginning August 1, you can invest in an L Fund by: -Changing your current contribution
allocation to invest future contributions. -Completing an interfund transfer to move your existing TSP account balance.
Click here for more information on L Funds for Federal Employees in the Thrift Savings Plan.