TSP fund choices

In short

A friend of mine spent thirty years in federal service and never once opened his Thrift Savings Plan statement. If you have a TSP account, you have probably felt a little like him. The plan is your retirement account as a federal employee or a member of the uniformed services. It gives you a short menu of funds, and picking from it is easier than it looks. Your first choice is between putting your money in one fund or letting a set of funds be blended for you. The G Fund holds special government securities and does not lose value from market swings. The C, S, I, and F Funds follow markets and can rise or fall. The L Funds blend those pieces by target date. Read the fund descriptions on tsp.gov, look at the cost of each fund, and pick what fits the year you plan to need the money. Then check your choice once a year.

The whole of it

What it is

I once watched a retired sergeant read a restaurant menu for ten minutes and then order the same thing he always got. The TSP menu can feel that way at first. The Thrift Savings Plan is a retirement savings plan for federal civilian employees and members of the uniformed services. It is run by the Federal Retirement Thrift Investment Board, and the official site is tsp.gov.

The plan offers five individual funds. The G Fund holds short term U.S. government securities made just for the TSP. The F Fund follows a broad index of U.S. bonds. The C Fund follows the S&P 500, which is a list of large U.S. companies. The S Fund follows smaller and mid sized U.S. companies that are not in the S&P 500. The I Fund follows stocks of companies in developed countries outside the United States. Each of these funds holds many holdings at once, so you are not betting on any one company.

The plan also offers L Funds, which are ready made blends of those five funds tied to a target year. The name of each L Fund carries a year, such as L 2050. The mix moves toward the safer funds as that year gets closer. The plan also has a mutual fund window, which is a separate account for people who want outside funds. That window has its own fees and rules, so read the plan documents before you use it.

How it works

A neighbor of mine once told me that the best gardens are the ones planted before you need the food. Your TSP works the same way. Money comes out of your pay, goes into the funds you pick, and stays there until you take it out.

You choose how to split each paycheck contribution among the funds. If you do not choose, your money goes into a default fund set by the plan. The plan explains its current default on tsp.gov, so check what it says for you. You can move money you already have between funds. That is called an interfund transfer. You can also change where your new contributions go. These are two separate choices, and many people only make one of them.

If you hold the L Funds, the plan does the moving for you. It shifts the mix toward the G and F Funds as the target year nears. If you hold the individual funds, nobody moves anything unless you do. That is the real difference between the two paths. One asks little of you. The other asks you to pay attention.

Each fund charges an expense ratio. That is the yearly fee, shown as a percent of the money you hold in the fund. The fee is taken out of the fund's earnings, so you will not see a bill. The TSP publishes these fees for every fund, and it is worth a look because small fees add up over decades.

The numbers, and where to find yours

You have probably wondered how much you are allowed to put in. The yearly limit on your own contributions is set by the IRS, and it changes over time. For this year it is the current figure, which the official source publishes each year. If you are old enough for catch up contributions, the extra amount is the current figure, which the official source publishes each year. The age when catch up contributions begin is the current figure, which the official source publishes each year.

Your agency may also add money. Under the Federal Employees Retirement System, or FERS, your agency puts in an automatic amount equal to the current figure, which the official source publishes each year of your basic pay. It also matches part of what you put in. The plan describes the match on tsp.gov. Members of the uniformed services under the Blended Retirement System have their own automatic and matching rules, and the Department of Defense explains those.

To find your own numbers, log in at tsp.gov. Your account page shows your balance, your fund mix, and your contribution rate. Your yearly statement shows the same. If you cannot log in, the ThriftLine phone number on tsp.gov will get you help.

A worked example

Let me tell you about Marcus. He is a 40 year old civilian employee under FERS. His salary is 52,000 dollars. He decides to put in 5 percent of his pay.

Marcus does the math to see what goes in each year. He multiplies 52,000 by 0.05. That gives 2,600 dollars a year from him. Split over 26 pay periods, that is 100 dollars a paycheck, because 2,600 divided by 26 equals 100.

His agency puts in an automatic amount of pay too. The official figure is on the plan's site. For this story, we will use a plain 1 percent. That is 52,000 times 0.01, or 520 dollars. The agency also matches part of what Marcus puts in. For this story, we will say the match adds 3 percent of pay. That is 52,000 times 0.03, or 1,560 dollars. So the agency puts in 520 plus 1,560, which is 2,080 dollars. That equals 4 percent of pay, because 52,000 times 0.04 is 2,080. Marcus's 2,600 plus the agency's 2,080 comes to 4,680 dollars in the first year.

Now Marcus picks his funds. He does not want to watch the markets. He plans to start using the money at age 65, which is 25 years away, so he looks for the L Fund with the year closest to that. He puts all of his money in that one fund. The plan does the rest.

Now suppose Marcus had picked only the G Fund for all 25 years. His money would be safe from market swings. But it would grow only as fast as the G Fund's interest rate allows. That may or may not keep pace with rising prices. This is not a call to buy or avoid anything. It is just what the choice would mean for him. Both paths are allowed. Each one has a cost, and that cost is not always a fee.

Where it goes wrong

I once knew a man who put every dollar in one fund and never looked again. Twenty years later, he was surprised. It does not take a crisis for this to happen. It only takes a long stretch of not checking.

The first trap is forgetting the default. If you never picked funds, your money may be sitting in the plan's default fund. It may not be what you would have chosen. Look at your account today, not next month.

The second trap is mixing the L Funds with the individual funds without meaning to. The L Funds already hold the five individual funds inside them. If you own an L Fund and also add the C Fund, you are stacking that stock exposure on top of what the L Fund already holds. That may be fine. It should be on purpose.

The third trap is moving money out of fear. Prices fall sometimes. Some people sell after a drop and miss the recovery. I am not telling you what to do. I am telling you that a plan you can stick with is worth more than a clever one you abandon.

The fourth trap is ignoring your contribution rate. A fund choice matters little if you put in too little. Check the rate too, and see whether your agency's match asks for more than you are giving. Free money left on the table is a real cost.

The last trap is taking money out early. Withdrawals before the age set by the IRS can bring extra tax and a penalty. Loans and hardship withdrawals have their own rules on tsp.gov. Read them first.

Questions to answer before you leave this page

Have you logged in to tsp.gov lately to see which funds hold your money? What year do you expect to need the money, and does the fund you picked match that year? Are you comfortable seeing your balance drop for a while without selling? Do you know what the fee is on each fund you hold, and have you read it on the plan's site? Are you getting the full match your agency offers, or are you leaving some behind? Do you hold an L Fund and an individual fund together, and did you mean to? Who will you ask if you need help, and have you written down the ThriftLine number so you can find it?