Well known investment guru John Bogle (founder of Vanguard Funds) said that the TSP’s index funds are a great way to invest. Image: B Calkins/Shutterstock.com
By: John Grobe, Federal Career ExpertsOne feature that many Thrift Savings Plan participants like about the TSP is its relatively simplicity. There are only five basic funds available, excluding the L funds. The L funds themselves are simply made up of the five basic funds. All the funds, except the G Fund track market indexes. A market index can be described as a hypothetical portfolio representing a segment of the financial market and measuring the performance of that market.
Well known investment guru John Bogle (founder of Vanguard Funds) said that the TSP’s index funds are a great way to invest. In an interview over fifteen years ago, Bogle stated that the TSP is “…as close to a perfect retirement plan as you can have….”
The Standard & Poor’s 500 (S&P 500) is the index that is tracked by the C Fund. The C Fund was the only stock fund available in the TSP from 1988 through mid-2001 and is larger than the other two stock funds (S and I) combined. The S&P 500 consists of the 500 largest publicly traded companies in the US.
The index tracked by the S Fund is the Dow Jones Total Stock Market Completion Index, which tracks the rest of the domestic stock market.
There has been some dispute about which index should be tracked by the I Fund, but it remains the Morgan Stanley Capital International Europe, Australasia and Far East Index (MSCI EAFE). This index is roughly 2/3 European and 1/3 Australasia and Far East. The TSP wants to switch to the MSCI All World Index, but Congress (coming to the realization that China is part of the world) wants no part of the switch. Expect inertia to prevail, resulting in the I Fund still tracking the MSCI EAFE.
The F Fund the Bloomberg Barclay’s US Aggregate Index and was introduced at the same time as the C Fund in January of 1988. It is the smallest of the TSP funds because most folks who want to invest in fixed income instruments choose to put their money in the G Fund.
The G Fund was the first of the TSP funds and appeared 9 months before the C and F Funds. It does not track an index; rather, it is made up of short-term U. S. Government securities and pays a rate that is set by law. That rate equals the return on outstanding Treasury securities with four or more years to maturity.
Because the L funds are made up of the five basic funds, they too are essentially index funds. Here’s how the TSP describes the L funds: “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.”
There are ten L Funds and, 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. The design of the 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.
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