Pay and Benefits Watch: Y2K and the Thrift Savings Plan

In August 1998, the Thrift Savings Plan's C Fund, which invests in the stock market, fell 14.5 percent, the biggest one-month fall since the creation of the TSP a decade ago.

While most federal employees ignored the drop, about two percent of TSP participants transferred their money out of the C Fund in August and September and into the F and G Funds, which invest in lower risk bonds and government securities, respectively.

But in September, October, November and December of last year, the C Fund more than made up the August loss. So when that two percent of TSP participants moved their money back into the C Fund in November and December, they missed out on the growth in the months in between. In fact, they ended up buying back into the stock market at higher prices.

That experience provides a cautionary tale on what investment experts call "market timing."

Market timing is a technique of moving around money in investments based on your predictions of the performance of those investments in the near future. The idea is to take your money out of investments before their values plummet to avoid losses, and to put your money back into those investments when you expect them to perform well and earn you a profit. Market timers essentially try to guess the market's ups and downs.

Many investment experts caution against market timing.

"The only way to really do that is with a crystal ball," said Denise Leish, a partner in Silver Spring, Md.-based Money Plans, a fee-only financial planning firm. "Since no one has a crystal ball, market timing can't really effectively be done. Many studies have found that when people try to take a market timing strategy, they ultimately lose in the long-run."

And so we come to the year 2000 computer problem, a.k.a. the Y2K problem. There are plenty of doomsayers around saying the Y2K problem is going to lead to recession or depression. So it's natural that many federal employees are wondering whether they should hide their money in the G Fund until the Y2K problem blows over.

Doing so would be an attempt at market timing. To Leish, Y2K is no reason to jump on the market timing bandwagon.

"I recommend not moving into the G fund from the C fund. I don't think there's going to be a negative market reaction to Y2K," Leish said. "It's just going to be like any blip in the market. You just weather the storm."

Leish also pointed out that most industry sectors in this country are mostly Y2K-compliant. (The computer systems that operate the TSP itself are Y2K-compliant, according to the Federal Retirement Thrift Investment Board.) But even if there is a dip in the market, Leish reminds TSP investors that the plan is a long-term program.

"If it's long-term money, then these little short-term blips shouldn't make any difference to you," she said.

Most investors appear to agree with Leish. In an ABC News poll conducted in March, two out of three Americans said they weren't planning on doing anything to reduce the possible disruptions Y2K could cause in their lives. Of the 29 percent who said they were planning some precautions, just one percent said they planned to sell off their stock market investments.

A survey conducted by Yankelovich Partners for the Securities Industry Association in April and May found a slightly larger group of likely Y2K market timers. Two percent of respondents in that survey said they had already taken money out of the stock market to avoid Y2K problems, another six percent said they would take money out by September, and an additional six percent by the end of December. Of those people planning to take money out of the market, 42 percent said they would put the money back in during the first quarter of 2000 and 24 percent said they would put the money back in during the second quarter of 2000.

If you choose to join the Y2K market timers, remember that TSP interfund transfers made before the 15th of each month take effect on the last day of that month. Transfers made after the 15th of each month take effect on the last day of the following month.

Either way, TSP investors will have to decide in the next four and a half months whether to ride out Y2K in the C Fund or abandon ship into the G Fund.