Fear of missing out, or FOMO, drives some people to compulsively check their cellphones and social media, but it also plays a role in investing. FOMO, for example, is often cited as a reason for people to pile on in a rising market, sending valuations beyond fair market value – leading in some cases to over-paying and losing money when valuations come back down. But when it comes to your financial security – and in the case of federal employees this has a lot to do with the TSP – FOMO is just one phenomenon to be wary of. For example, you could invest too little, or attempt to time the market and pull out too soon and miss out on big gains. Choosing the wrong funds or choosing to sit on the sideline for too long can all wind up being costly as well.
That was underscored in the latest TSP self-analysis, sent to Congress in an annual report showing all of those mistakes, in many cases continuing for a long time.
At one time, there was a built-in excuse: the TSP was a new program, and it takes time for people to get used to these things. But the TSP is now above 30 years old and anyone who has been in government for a significant part of that period has had every chance in the world to maximize their TSP. And yet…
And yet about a third of employees under CSRS—who have had the option of investing in the TSP that entire time, except for possible breaks in service—don’t invest and are missing out on its tax advantages. Time for them is fast running out, with nine-tenths already eligible to retire.
And yet among those under FERS—who also get tax advantages plus automatic government contributions of 1 percent of salary plus up to another 4 percent by investing personally—7 percent don’t invest. That’s despite a policy in effect for the last decade in which newly hired employees invest by default, rather than having to opt in as was required previously. In fact, about 3 percent of those hired under default investing opt out.
Why? In many cases, it’s likely because they can’t afford to invest, or at least think they can’t. The TSP broke down the FERS population into five groups according to salary and found that investing generally increases by salary level, from about 90 percent to about 97 percent among the five quintiles. That was generally up slightly over the last five years, due to the cumulative effect of default investing.
Not surprisingly, among those who invest the percentage of salary invested also increases by salary level. But overall, average investment amounts actually have been declining, leveling off at 7.9 percent of salary for the last four years, down from 8.1 percent in 2014 and down from 9.5 percent a decade earlier. Nearly a third are investing at less than the 5 percent needed to capture the maximum government contribution—and thus are leaving free money on the table, although less of it than those who are not investing at all.
Ironically—and as was pointed out recently by a Congressional Budget Office study—automatic enrollment also plays a part in that decline. “While increasing the participation rate by including many new participants who would not otherwise have been participating, many of these auto-enrolled participants have continued to contribute at the 3% default level,” the TSP analysis says.
Beyond whether and how much to invest lies the question of where to invest. The TSP simplifies that decision by offering just five standard passive index-based funds plus five lifecycle funds that blend investments in those according to the projected date to begin withdrawals. Among the basic five, the government securities G fund has no risk of losses but a limited potential for return, while the three stock-based funds (S, C and I) are basically the opposite, with the bond F fund in between. The lifecycle L funds range in risk/return profiles from Income on the low end to 2050 on the high end.
See also, Pros and Cons of the Lifecycle Funds
As might be expected, among ever-higher age groups, use of the G fund and of the L Income fund rises. “This behavior is consistent with the expectation that participants shift their investment allocation toward the relative safety of guaranteed/income producing assets as they approach retirement age,” the TSP said.
However, the TSP also found it notable that those under age 30 “who have the longest time horizon to reap the benefits of compounding returns have 24.8% of their assets invested in the G fund”—suggesting that they are investing too conservatively. But even that is an “improvement” over the 41.7 percent number of five years before, it said, largely attributing the change to the 2015 switch in the default investment fund for new hires from the G fund to the L fund appropriate for their age.
It added that “roughly a quarter of participants under 50 are solely invested in the G Fund, a very low risk fund which may not be the best option for those with longer investment horizons.”
See also, Downside of the G Fund: Low Returns
The TSP didn’t say it outright, but its message was clear: in terms of investment rates, investment levels and choice of investments, it believes that many of its investors are missing out.