There are some counter-intuitive things happening with investment choices among federal employees. Image: Teerachai Jampanak/Shutterstock.com
By: Lisa Whitley, AFC®, CRPC®Every June 30th, the Federal Retirement Thrift Investment Board publishes its Annual Report for the previous calendar year. What can we learn about TSP investors’ behavior from the most recent report? What are you and your peers doing right as you save for retirement? And where are you perhaps missing the mark?
It’s a bit of a good news/less-good news story. The best news is that 96% of feds participate in the TSP. The average employee contribution is about 9% of salary. When combined with the employer match of 5%, that means that on average feds are saving a very respectable 14% of their salary for retirement. But there’s a “but”: Lower paid federal workers are deferring less, as a percentage of their salary, than their better paid co-workers. The difference is about three percentage points. That’s not surprising of course, but it is a cause for concern.
Another point of divergence between lower and higher paid employees – a more curious one – is that the popularity of using the Roth TSP increases with income. Strict mathematical logic would make you think that the highest paid employees in the 32% or 35% marginal tax bracket would be more attracted to the option to defer paying taxes until retirement; in fact, it is rather the opposite.
There are some counter-intuitive things happening with investment choices as well. Overwhelmingly, TSP investors opt to diversify their portfolio among the various letter funds, including by using Lifecycle Funds. But there are a few concerning statistics:
- The lowest paid feds allocate about 30% of their portfolio to the G Fund, compared to 17% for the highest paid feds. Of course, we know that risk aversion and lower income generally goes hand-in-hand for good reasons, and yet it may also speak to a lack of investor confidence among lower-paid employees.
- Among retirees, there is a pretty sizable percentage (between 20% and 40%) who allocate their portfolio to the G Fund exclusively. These are the distribution years and so while I would expect to see a heavy allocation to G in retirement, well, retirement can last thirty years. This could be more conservative than is warranted and possibly even lead to shortfalls later.
I am on record as being very much in love with Lifecyle Funds. Are feds using them as intended? Last year, 53% of participants used at least one L Fund. Here’s my beef though: only 37% of participants used an L Fund exclusively. People, hear me on this: The entire purpose of an L Fund is to be an “all in one” investment solution. When you mix different L Funds together in your portfolio or combine an L Fund with one or more of the core funds, you have achieved…well, it is not at all clear what you have achieved. And that’s a problem.
I am also a bit befuddled that the popularity of the L Fund declines very precipitously with age. To some extent this is predictable as it only became the default investment option upon hire in 2015. Also, as one progresses in age, it is understandable that you may feel more confident making a more personal investment selection. But as the L Fund really shows its value at retirement, helping retirees manage sequence of return risk while not overly de-risking, I am not sure that the slim allocation to the L Fund among those in their 60s (only about 20% use an L Fund exclusively) is a good thing. It would be an interesting survey question: Why do feds fall out of love with their L Fund as they get older?
Of course, we must talk about leakages from the TSP, that is, hardship withdrawals and loans. The rates have been trending upwards over the last five years: In 2024, 8.5% of participants had an outstanding loan and almost four percent had taken a penalized withdrawal. Middle age seems to be the danger zone for untimely withdrawals, presumably reflecting the multiple financial stressors that occur in one’s forties (home buying, children, etc.)
Finally, remember the Mutual Fund Window (MFW)? No shame if you don’t: Only one-half of one percent of TSP assets are invested through the MFW. While that does represent about 6500 hardy souls among more than four million TSP participants, one wonders how long this experiment will persist.
After an 18-year career as a Foreign Service Officer with the United States Agency for International Development (USAID), Lisa Whitley switched gears and became a personal finance coach in 2019. Since then, as a financial guide with an employee wellness company, she has counseled hundreds of persons on topics such as budgeting, debt, retirement, housing, paying for education and more. She has established her own firm, MoneyByLisa, a Registered Investment Advisor domiciled in the District of Columbia. Lisa is an Accredited Financial Counselor (AFC®) and Chartered Retirement Planning Counselor (CRPC®).
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