Picking Smarter Investments in Your TSP:  Todd Carmack

If done carefully, it’s possible to use the government’s plan for retirement to your benefit. Almost five million people keep some or all of their savings for retirement in the United States government’s Thrift Savings Plan (TSP). However, many people may not be managing their TSP to its full potential.

The U.S. Government Thrift Saving Plan is similar to a 401 (k) plan. Every pay period, money is automatically contributed and invested into one or more of the three basic options for investment.

The TSP is easy, unlike many 401 (k) and similar plans, and has a very wide range of choices for investment. This avoids several chances of errors. Nevertheless, it also eliminates some significant asset classes which can increase value in the long term for those who save for their retirement.

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Target-retirement date funds are offered for those who wish to have choices made easy for them and also evolve automatically towards a conservative stance as investors grow older.

Those who would rather make their own choices are provided with five options by the TSP. They include:

• “S” Fund: This is an index of all stocks in the U.S. that are not found in the S&P 500 index. This implies a small-cap and midcap stock.
• “C” Fund: This is a duplicate of the S&P 500 index SPX, -0.11%.
• “F” Fund: This is a record of bonds worldwide, both corporate and government.
• “I” Fund: This is a duplicate of an MSCI EAFE Index EFA, 0.07% of the stocks internationally in twenty-one different markets not including those in Canada and the U.S.
• The “G” Fund: This is a short-term investment in the U.S Treasury securities which aren’t exposed to the risk of the stock market or bond.

The above five choices provide exposure to international stocks, small-cap and large-cap U.S stocks, a large bond market, and a cash-like option (which is risk-free).

The lack of any value option is one of the most visible weaknesses of these choices. Over the years, the value stocks provided superior returns in the long run to the growth stocks which have proven to dominate the “S” and “C” funds under the TSP.

TSP Solutions to Consider

These concepts are divided into the 3 categories:

• Aggressive – Calls for 100% equities
• Moderate – Calls for 60% equities
• Conservative – Calls for 40% equities

For every investor category, it is recommended to divide the portfolio’s equity the same way (i.e. 25% in “I” and 25% in “C” as well as 50% in “S”).

The differences between these 3 groups have to do with how much (if any) of the portfolio should be in the “F” and “G” funds. In other words, not exposed to the stock market risks.

HIGHER POTENTIAL RETURNS (WITHIN THE TSP)

Emphasizing the “S” fund may result in higher returns in the long run, so keep this in mind when making a decision between the 5 options of the TSP. Doing this can tilt the portfolio in the direction of midcap and small-cap stocks, which have been known to outperform large-cap stocks (such as those of the “I” and “C” funds) in the long term.

For instance, aggressive investors (which may include many people in their 20’s and 30’s) might place 70%/80% (or maybe up to 100%) of their “S” fund portfolios.

An easy way to increase the returns expected for both moderate and conservative investors is to own more equity funds. For instance, the combined equity stake could be increased by the moderate investor ranging from 60% to 70% or higher.

Your expected return in the long-term increases by 0.5% per year for every additional 10% held up in equities. That seems a little small but can make an enormous difference after a few years, increasing the money you will have when you are retired.

Consider keeping 10% to 40% of your usual contribution in the “S” fund if you are included in a TSP target-date fund.

HIGHER POTENTIAL RETURNS (OUTSIDE OF THE TSP)

Having read this article, you have learned that a moderate value stock allocation, specifically the value stocks of the small-cap, can potentially boost your return in the long run significantly.

Even though these value options are not offered by the TSP, it’s possible to increase your government retirement plan with a different account. A good option is the Roth IRA, through which you can give up to an amount of $5,500 annually ($6,500 for those over 50).

One of the best ways to use an account such as this to supplement your TSP account is by investing the whole of your IRA into emerging market small-cap value and large-cap value stocks.

If only a small amount is available for this, then the way to get the most out of it is to just add small-cap value in either an ETD or a low-cost index fund.

For any questions you may have regarding your TSP or other retirement options, please contact a financial advisor for a consultation.