Many TSP Lifecycle Investors Misusing Funds

December 21, 2005 ( - While participation in the lifecycle fund options in the federal employees' Thrift Savings Plan (TSP) has surpassed board expectations, many of those choosing lifecycle funds are holding on to the traditional stand-alone funds as well.

About 214,000 participants have invested $7.3 billion into the lifecycle funds. However, TSP officials said 55% of participants investing in lifecycle funds still have money in at least one other fund as well, according to   Sixteen percent of lifecycle fund investors have money in all five of the stand-alone funds.

In August the TSP added lifecycle funds (L funds) to its lineup that already included the Common Stock Index Investment (C) Fund, the Small Capitalization Index Investment (S) Fund, the International Stock Index Investment (I) Fund, the Fixed Income Index Investment (F) Fund, and the Government Securities (G) Fund (See  TSP L Funds Exceed Expectations).   Within four months 5.5% of TSP participants had put $6.8 billion or almost 4% of the TSP’s assets into the funds (See  Lifecycle Funds Still On Fire at TSP).   The Board is currently proposing to make the L funds the default investment option for the plan (See TSP Board Wants Plan Changes).

In addition to the investors who are keeping money in all five stand-alone funds, 6% of lifecycle participants also have money in four stand-alone funds, 11% have money in three, 9% have money in two and 13% also have money in one additional fund. reports that one of the reasons the lifecycle option was developed was to encourage participants to stop depending on the G fund alone.   The G fund has no risk since its returns are guaranteed by the government, but it also does not provide the returns necessary to grow retirement income.

Gary Amelio, TSP executive director, said one explanation for participants’ hold on traditional funds could be that, for new participants, the first month’s assets go directly into the G fund regardless of fund selection.   Participants might unknowingly be keeping one month’s investments in the G fund.

Lifecycle Offerings Increasingly Popular

Lifecycle funds are gaining in popularity for defined contribution plans.   The funds offer a pre-selected asset allocation, making it easy for participants to diversify their investments.   The funds are intended to hold 100% of a participant’s plan account balance.   Research has shown that asset allocation along with periodic rebalancing, characteristics of lifecycle funds, produces better investment returns (See  Asset Allocation: The Key to Better Returns).

The Investment Company Institute’s “Mutual Funds and the US Retirement Market in 2004” notes that the investment in lifestyle and lifecycle funds grew from just $6 billion in 1996 to $27 billion in 1999, and continued to accelerate to $44 billion in 2002, $69 billion in 2003, and $103 billion in 2004 (See Special Report: LIFESTYLE FUNDS: Easy Does It?).   Further research, by Vanguard, has shown that including a lifecycle option in a defined contribution plan increases participation rates (See  Lifecycle Funds Boost Participation).

The TSP Board is seeing, however, that of those participants invested only in lifecycle funds, 95% have all their balance in just one of the lifecycle options.   Employees are encouraged to choose from funds that most closely match their target retirement year among choices of 2040, 2030, 2020, 2010, and within the next few years.

The TSP is considering sending targeted educational materials to those participants using the lifecycle funds improperly.