The Thrift Savings Plan (TSP) has offered Lifecycle Funds for fifteen years. The funds were first offered in ten-year intervals in July of 2005 and were changed to five-year intervals in July 2020. Here are 12 things to know about the TSP’s L Funds and how they work.
1. As usual, the TSP was not the leader of the pack when it came to offering funds based upon the year in which the plan participant anticipated needing the money. According to Wikipedia, this type of fund was introduced in the early 1990s by two advisors who worked for Wells Fargo Investment Advisers.
2. The Thrift Board wanted to introduce the L Funds earlier than 2005 but were hamstrung by the TSP’s antiquated computer system. In the early 2000s, the TSP’s chosen contractor tried and failed several times to update the Board’s computer system.
3. Throughout most of the investment industry funds like the Lifecycle Funds are referred to as “Target Date Funds”.
4. Most employer sponsored retirement plans offer a series of target date funds for their participants; and individual investors have a wide choice of target date funds offered by investment companies. Target date funds can be held in both taxable accounts and tax deferred accounts (like IRAs and employer plans).
5. Each L Fund is made up of the five basic TSP funds (G, F, C, S and I) in different proportions. This simplicity allows the TSP to avoid charging any extra fees for investing in the L Funds. Many private sector employer sponsored plans charge extra fees for participating in their target date funds.
6. The further away the target date is, the higher is the concentration of stock (C, S and I) funds. Someone who is retiring in 2026 might choose the 2025 or 2030 fund, while someone retiring in 2048 might pick the 2045 or 2050 fund.
7. Related to the above point, one should always focus on when they feel they would need the money, rather than when they plan on retiring from federal service in choosing a Lifecycle Fund in which to invest. If you will retire from your federal job in 2025 but plan on working for an additional ten years in the private sector, you might want to invest in the L 2035 rather than in the L 2025.
8. When the L Funds were introduced, the Thrift Board suggested an “all or nothing” strategy with your L Fund investments. The L Funds were designed to stand by themselves, not to be mixed with other TSP funds.
9. All of the lifecycle funds, except for the L Income Fund, change their asset allocation each calendar quarter.
10. Each L Fund is rebalanced at the end of each business day. This task is the reason why the TSP needed a robust computer system to support the introduction of the L Funds.
11. Each L Fund will eventually be merged into the L Income Fund. We’ve already seen the L 2010 and the L 2020 funds rolled into the L Income Fund.
12. If you are comfortable with the TSP’s allocations in the various L Funds, you should consider a “set it and forget it” strategy and put your money in the appropriate L Fund.