The TSP has announced that it will increase the percentages of its lifecycle L funds that are invested in its three stock-oriented funds, the most significant revisions to those funds since they were launched in 2005. However, for four of the five, the main impact in the years just ahead will be only to hold steady the percentages invested in stocks and prevent decreases that otherwise would have occurred.
The TSP said it is shifting more toward stocks in the wake of an outside study it commissioned that concluded that its lifecycle funds have a more conservative investment profile — that is, weighted more heavily toward fixed-income investments through its F and G funds — than is standard in the investment industry. Another factor was that investors on average are starting their withdrawals later than in the past, now at age 63 on average, giving them more time to benefit from stock price gains or to recover from losses.
The key changes ahead include:
The L income fund, which currently has 20 percent of assets invested across the three stock-oriented (C, S, I) funds and has not changed those allocations over time, will increase that to 30 percent, in 1 percentage point increments per year for 10 years starting in 2020.
Three of the four target-date funds (2030, 2040, 2050) will be frozen at their current stock-to-fixed income ratios rather than becoming more conservative over time as has been the practice (the stock portion has been decreased slightly each calendar quarter). They are to remain frozen until their percentages allocated to stocks match what they would be if the funds had started with a more stock-oriented profile. The TSP expects that will happen in six, 10 and 14 years, respectively, for those three funds.
The 2020 fund meanwhile will change marginally to put it on a path to match the income fund’s profile in the middle of that year, after which the two will merge. Those two funds already have nearly the same investment mixes.
Meanwhile, the I fund will make up more — and the C and S funds less — of the part of each L fund’s portfolio that is invested in stocks. The TSP earlier had committed to having L funds in five-year increments from 2025 through
2065 starting in 2020. The new 2060 and 2065 funds now will start with 99 percent invested in stocks, rather than the previously planned 90 percent.
As of June, the five L funds together held nearly $113 billion, 20.3 percent of the nearly $554 billion in the TSP.