Consider the Mutual Fund Window If: You are an experienced investor who understands mutual fund expenses and is willing to pay higher fees for additional investment choices. Image: tadamichi/Shutterstock.com
The Thrift Savings Plan (TSP) is a useful retirement savings vehicle for federal employees and military personnel. Most participants are familiar with the five core TSP funds: the G Fund, F Fund, C Fund, S Fund, and I Fund. These funds provide a range of investment options, from government securities to stock index funds.
However, there is more to the TSP than just these five basic funds. In addition to the core funds, the TSP offers two other investment options: the Lifecycle (L) Funds and the Mutual Fund Window. Each of these options comes with its own set of advantages and drawbacks, and understanding them can help participants make better-informed decisions about their retirement savings.
The Lifecycle (L) Funds
The Lifecycle (L) Funds are designed to simplify retirement investing by automatically adjusting asset allocation based on a target retirement date. These funds are structured in a way that they become more conservative as the investor approaches retirement.
How L Funds Work
Each L Fund corresponds to a different retirement timeframe, such as L2030, L2040, or L2050. The further the target date, the more aggressive the fund allocation. For example, an L2050 Fund will have a higher proportion of stocks (C, S, and I Funds) compared to an L2030 Fund, which will hold more conservative investments (G and F Funds). Over time, the allocation gradually shifts to reduce risk, ensuring a smoother transition into retirement.
Pros of L Funds
● Automatic Allocation: The L Funds adjust their allocations without requiring participant intervention, making them a convenient option for hands-off investors.
● Diversification: These funds spread investments across all five core TSP funds in varying proportions, providing built-in diversification.
● Simplicity: L Funds offer a straightforward way to invest without the need for constant rebalancing.
Cons of L Funds
● Overly Conservative: Some financial planners argue that L Funds become too conservative too quickly, which may reduce potential growth for long-term investors.
● Limited Customization: Unlike choosing individual funds, participants in L Funds cannot adjust their allocations beyond selecting a target date.
Recommendation for L Fund Investors
Many federal employees default into an L Fund based on their projected retirement year. However, some experts recommend selecting an L Fund with a later target date than the actual retirement year. This strategy can help maintain a higher allocation in equities for a longer period, potentially increasing retirement savings over time.
The Mutual Fund Window
The Mutual Fund Window is a relatively new feature that allows TSP participants to invest in a broader range of mutual funds beyond the core five TSP funds. This option opens the door to thousands of mutual funds, providing more flexibility and potential investment opportunities.
How the Mutual Fund Window Works
To access the Mutual Fund Window, participants must transfer money from their core TSP funds into the window. Once funds are moved, investors can select from a wide array of mutual funds, including actively managed funds, sector-specific funds, and socially responsible investment funds. For more information about the mutual fund window, see the TSP website: https://www.tsp.gov/mutual-fund-window/
Pros of the Mutual Fund Window
● Expanded Investment Choices: Participants have access to a vast selection of mutual funds, allowing for greater customization.
● Specialized Investment Opportunities: Investors can choose funds that align with their specific financial goals, risk tolerance, or ethical investing preferences.
● Potential for Higher Returns: Certain mutual funds may offer the possibility of outperforming the TSP core funds over the long term.
Cons of the Mutual Fund Window
● High Fees: One of the major drawbacks of the Mutual Fund Window is the cost. Unlike the core TSP funds, which have extremely low expense ratios (around 0.05%), many mutual funds come with significantly higher fees, sometimes exceeding 1%.
● As of 2025, Here are Additional Costs:
○ Annual Administrative Fee: Around $55 per year.
○ Annual Maintenance Fee: Approximately $95 annually.
○ Per-Trade Fee: Roughly $28 per transaction.
Source: https://www.tsp.gov/mutual-fund-window/
These costs can quickly add up and eat into investment returns, making the Mutual Fund Window less attractive for most participants.
● Complexity: Managing mutual fund investments requires more knowledge and active oversight compared to the passive nature of the core TSP funds.
Recommendation for the Mutual Fund Window
For most federal employees, the high fees associated with the Mutual Fund Window outweigh its benefits. Unless an investor has a specific reason to use the Mutual Fund Window—such as access to a particular fund they strongly believe in—it is generally more cost-effective to stick with the core TSP funds or L Funds. Remember, complexity does not always bring better results.
Which Option Is Best for You?
Choosing between the core funds, L Funds, and the Mutual Fund Window depends on your financial goals, risk tolerance, and investing experience. Here’s a quick breakdown:
● Stick with Core Funds If: You want low fees, simple fund options, and direct control over asset allocation.
● Choose L Funds If: You prefer an automated investment approach that gradually adjusts as you near retirement.
● Consider the Mutual Fund Window If: You are an experienced investor who understands mutual fund expenses and is willing to pay higher fees for additional investment choices.
Conclusion
While the five basic TSP funds provide a strong foundation for retirement savings, federal employees have additional options in the form of L Funds and the Mutual Fund Window. L Funds offer a convenient, automatically managed investment strategy, while the Mutual Fund Window provides access to a broader array of investment choices—at a cost. For the average investor, the core TSP funds or L Funds will likely be the best choices due to their simplicity, low fees, and strong diversification. However, for those who seek more control and are willing to pay higher fees, the Mutual Fund Window can be an option to explore. Understanding these choices can help federal employees optimize their retirement savings strategy and make informed financial decisions for the future.
Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.
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