In 2003, the Thrift Board became concerned about the allocation of monies in the TSP and decided to do something about it. 2003 was a good year for stocks and the two highest returning stock funds (S and I) had between them less than half of the money that was invested in the C Fund. Now, the C Fund was no slouch in 2003, with a return of greater than 30%, but the S Fund topped 40% that year. The TSP Board’s thought was that investments should be more evenly spread among the TSP’s already existing funds.
The Thrift Board decided that the concept of “target date” funds, then being introduced in the market, was a good idea and planned on introducing similar funds within the Thrift Savings Plan. Finally, on July 1, 2005, the TSP introduced the L Funds. The Thrift Board is known for its caution, but the two-year delay in implementing the L funds had nothing to do with caution; rather it had to do with the TSP’s antiquated computer system and the difficulty in updating it so that it could handle the daily re-balancing of investments that was needed in order to make the L Funds work.
The TSP didn’t unnecessarily complicate matters when they introduced the L Funds; they took the five basic funds (C, S, I, F and G) and combined them in different percentages within each of the five L Funds.
The “L” in L Funds comes from the word “lifecycle”. Here’s how the TSP describes the L funds on their website:
“The L Funds, or ‘Lifecycle’ funds, use professionally determined investment mixes that are tailored to meet investment objectives based on various time horizons. The objective is to strike an optimal balance between the expected risk and return associated with each fund.”
There are five L Funds and, conceptually, the individual who is about to retire would choose the L Income or the L 2020 Fund, while the kid we hired last Monday would elect to invest in the L 2050 Fund. In fact, new employees are automatically enrolled in the age-appropriate L Fund. The design of the funds is based on the commonly accepted investing wisdom that one should get progressively more conservative in their investment allocations as they near their goal.
The funds are adjusted each calendar quarter to a slightly more conservative mix. In addition, the TSP reserves the right to make other changes in the funds, if needed. For example, last year all funds except the L Income Fund were adjusted to have larger balances in the G fund. The table below shows the breakdown of each L Fund for the quarter running from July through October of 2016.
The value of TSP investments can fluctuate greatly and the quarterly adjustments of the L Funds’ mix is tiny (for example the S Funds percentage in the L 2030 fund changed from 9.99% in the second quarter of 2016 to 9.92% in the third). Therefore, the TSP will re-balance each fund at the end of the business day.
Let’s use the metaphor of a cross-country train trip (from New York City to San Francisco) to illustrate how the L funds work.
- The L 2050 train only recently left Grand Central Station in New York City and by now has reached eastern Pennsylvania.
- The L 2040 train is between the Indiana-Ohio border and Indianapolis.
- The L 2030 train is getting close to the Nebraska-Wyoming border.
- The L 2020 train is going through Donner Pass near Lake Tahoe.
- The L Income train is already in Union Station in San Francisco.
On July 1, 2020 the L 2020 train reaches Union Station in San Francisco (i. e., it has the same allocation as the L Income Fund as of that date).
On January 1, 2021, the L 2020 train ceases to exist (it is merged with L Income).
Also on January 1, 2021, the L 2060 train leaves Grand Central Station in New York City on its cross-country journey.