Does it make sense to periodically rebalance your investments in the Thrift Savings Plan? Most financial advisors would say “yes” and would go even further, suggesting that you rebalance other investment vehicles too (e.g., IRAs, taxable accounts, etc.).
Based on when you expect to need your investments, you should come up with an asset allocation that fits your needs. You should look at both your estimated future financial needs and your tolerance for risk. A level of risk that is fine for one investor might not fit another. J. P. Morgan once asked the following question about risk tolerance: “Do you want to eat better or sleep better?” You would choose an asset allocation based on your own personal sleep quotient.
Financial planners suggest that you rebalance your portfolio each year so that it maintains its desired balance. For example, if your desired allocation was 50% C and 50% G, and you had $100,000 in your TSP, you would begin the year with $50,000 in each fund. Let’s say that the C Fund grew 15% over the year, and the G fund grew 4%, you would end up with 52.5% ($57,500) in the C Fund and 47.5% ($52,000) in the G Fund. To keep the 50/50 balance, you would need to reallocate your investments so that both the C and G Funds had $54,750.
But wait, do you want to go through the act of rebalancing your TSP each and every year? Way back in 2005, the Thrift Savings Plan made it easy for you when they introduced the L Funds. The L Funds are similar to what are called “target date” funds in the private sector. Those who choose the L funds allow the TSP to allocate their investments for them. The Thrift Board follows conventional investing wisdom and allocates the funds so that the further you are from retirement, the more aggressive your investments are and the closer you get to retirement, the more conservative they become.
The L funds are re-balanced on a daily basis and all except the L Income fund are adjusted (towards a more conservative allocation) on a quarterly basis. The allocations in the chart below are from October 2022.
The average annual change in allocation is relatively slight until the last five years of the fund’s existence (e.g., until 2025 for the 2030 fund, etc.), then the change towards the G fund accelerates. Unlike many private sector 401(k) plans, the TSP does not charge an additional fee to participate in the L funds. The TSP periodically adjusts the investment mix in the funds. Information on the individual and L Funds can be found on the TSP website at https://www.tsp.gov/publications/tsplf14.pdf.
The TSP didn’t complicate matters when they introduced the L Funds. What they did was take the five basic funds (C, S, I, F and G) and combine them in different percentages within each of the five L Funds. Conceptually, the individual who is about to retire would choose the L Income or the L 2025 Fund, while the kid we hired last Monday would elect to invest in the L 2065 Fund. In fact, new employees are automatically enrolled in the age-appropriate L Fund at a 5% contribution rate.
Do it yourself – or – L Funds, the choice is yours.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.