The L Fund you are in should match the date you expect to start withdrawing your money, not your projected retirement date. Image: GamePixel/Shutterstock.com

TSP participants choosing to invest in Lifecyle or L Funds may be making less money than they could because of the L Fund risk management strategy.

L Funds are better known as target-date retirement funds.  These funds manage investment account risk by predetermining years in advance without any consideration for current financial market conditions, how the fund will move from stock-based mutual funds (C, S, I Funds) to bond and cash-equivalent funds (F and G Funds) to become, in theory at least, more conservative as its target date approaches.

That sounds wonderful, but here is the problem:  The L Fund has no choice but to mitigate risk by choosing more conservative investments years if not decades prematurely because of its risk mitigation strategy.  This approach costs you on both sides—growing your wealth during good times and preserving your capital during bad times.

Most TSP participants acquire their largest amount of TSP account assets after the age of 40 when the TSP’s L Funds are already becoming ultra conservative in their asset allocation.  This leads to missed opportunities at growing your wealth when it matters most—when you have the largest amount of assets in your account to build upon.

The reverse is also true.  Take for example, the L Funds predetermined use of the combination of the F and G Funds to reduce risk in any of the L Funds over the past three years.  As of the end of February 2024, the F Fund has returned a -3.02% over the past three years while the G Fund has returned 3.03%.  Anyone paying attention, such as a financial professional, could have identified it would actually be less risky and more profitable to have the combined F and G Funds completely allocated into the G Fund over this three-year period of time.

Yes, the F Fund can lose money, even over a three-year period of time!  While this isn’t the only change in strategy I’d recommend, it is one small example of the type of big results one small change can make.

If you insist on using an L Fund, make sure it’s the correct one. The majority of TSP participants investing in L Funds know these funds manage financial market risk, but what participants typically don’t know is how this mix of asset classes is allocated over the years – known as the glide path.

There are two different types of glide paths used by target-date retirement funds.  The first type is the type of glide path the L Funds use, known as the “to” glide path.  Take, for example, the L 2050 Fund.  Once the year 2050 is reached, the allocations remain the same thereafter.  Other target-date funds use a “through” glide path, meaning the asset allocations continue to adjust into retirement.


Why does this matter to you?  Because you should be investing in the L Fund whose date matches most closely to when you expect to start withdrawing your money from your TSP account, not your projected Federal government retirement date.  In all likelihood, with social security, pensions, post federal service contracting work, etc, these won’t be the same date!

Another item to consider is the relatively conservative nature of the TSP’s L Fund glide path.  In comparison to T. Rowe Price’s “through” glide path, all of the TSP’s L Fund’s have 8% and 25% less stock-based mutual fund exposure at 10 years and 0 years, respectively from retirement.  This is a big difference.

In short, this means, regardless of which type of glide path you are considering, the TSP’s glide path is very conservative—allocating a lower percentage of assets to stock-based mutual funds—at the same period of time versus their private sector target-date retirement fund peers.  Certainly something to think about!

Scott Swisher helps federal government employees better manage risk where they hold their largest amount of investment account assets, in their TSP accounts.  He is owner of TSP Change Alerts, a company providing TSP tactical reallocation services to individual federal government employees.  Scott can be reached at scott@tspchangealerts.com.

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