Do the Thrift Savings Plan’s Lifecycle (L) Funds work as advertised? They sure do! The L Funds are what is called “target date” funds, and are a method of allocating investments in one’s TSP account based on how far the participant is from needing the money. Here’s how the TSP describes the L funds on their website: “The L Funds, or ‘Lifecycle’ funds, use professionally determined investment mixes that are tailored to meet investment objectives based on various time horizons. The objective is to strike an optimal balance between the expected risk and return associated with each fund.”
The TSP didn’t unnecessarily 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 2020 Fund, while the kid we hired last Monday would elect to invest in the L 2050 Fund. In fact, new employees are automatically enrolled in the age-appropriate L Fund at a 3% contribution rate, scheduled to increase to 5% by 2020. The design of the L Funds is based on the commonly accepted investing wisdom that one should get progressively more conservative in their investment allocations as they near their goal.
In 2020 the L Funds will change from 10-year intervals to 5-year intervals.
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 following allocations are from April 2019.
Fund Need Money C S I F G
L Income Now 10.79% 2.70% 7.26% 5.94% 73.31%
L 2020 2015 to 2024 14.50% 3.74% 9.83% 6.20% 65.73%
L 2030 2025 to 2034 30.48% 8.60% 21.04% 6.96% 32.92%
L 2040 2035 to 2044 35.82% 10.82% 25.11% 7.49% 20.76%
L 2050 2045 + 40.06% 13.08% 28.61% 7.37% 10.88%
The value of TSP investments can fluctuate greatly and the quarterly adjustments of the L Funds’ mix is tiny (for example the S Funds percentage in the L 2030 fund will change from 8.60% in the second quarter to 8.59% in the third). That’s why the TSP re-balances each fund at the end of the business day.
In 2018 the year ended with the three most risky funds (C, S and I) all in negative territory. The F Fund was almost even at the end of the year, eking out a 0.15% gain, and the G Fund had its best year in a while with a return of 2.91%. If the L Funds worked as they were designed to, the conservative L Income Fund would have had the best return and the most aggressive of the funds (L 2050) would have had the worst. Well, they worked as designed; here’s the L fund returns for 2018.
1. L Income: 0.71%
2. L 2020: <- 0.36%>
3. L 2030: <- 3.58%>
4. L 2040: <- 4.89%>
5. L 2050: <- 6.02%) The L funds cushioned the blow of stock fund losses and dampened the gain of the G Fund.