Life-cycle funds could become TSP default option

Thrift Savings Plan participants who don't specify how they'd like to allocate their retirement savings are likely to see them placed in a sophisticated blend of investments, a TSP official said Monday.

TSP Executive Director Gary Amelio said he may ask the board overseeing the 401(k)-style retirement savings account for federal employees to designate the new "life-cycle" (L) funds as the default option for investors who don't express a preference.

Currently, contributions to the TSP are invested in the government securities (G) fund unless participants indicate otherwise. The G fund is the safest of the funds, but it also has little room for high returns.

Amelio said too many participants are putting too much money in the G fund and are not giving their TSP accounts room to grow. About 38 percent of the money in the TSP is invested in the G fund, he said.

The L funds, which were introduced in August, automatically distribute a participant's money among the five stand-alone funds in the TSP. Those include investments in small and large domestic companies, international companies, bonds and the government securities. The L funds reallocate money as participants age, distributing it among the five funds more conservatively as participants near retirement.

To date, 138,252 participants, or about 3 percent of TSP investors, have opted to put about $4.5 billion into the L funds. The number would climb higher if the board designates that fund as the default option.

The life-cycle funds have been successful enough to warrant a spot as the default fund for indecisive investors, Amelio said at the board meeting.

"There is no question in my mind," Amelio said, "given the wild success with this, that at some point I would recommend the board ask Congress" to switch the default fund from G to L.

Amelio called the L funds "professional money management at virtually no cost."

For the change to go through, the board first would have to vote to recommend it. Then, according to TSP spokesman Tom Trabucco, Congress would need to pass legislation approving the switch.

Employees in the Federal Employees Retirement System receive an automatic 1 percent agency contribution to the TSP on their behalf, regardless of whether the employee chooses to contribute savings or not. Some of the default funds may come from FERS employees who never contributed themselves and therefore never made a fund decision. As of September, about 248,000 FERS employees were not contributing to the TSP, according to plan administrators.

The switch, although likely, will take some time, Amelio said. The board is not ready to make a proposal, and will need to wait to see how the L funds perform over time. The board recently hired a consulting firm, Ennis Knupp & Associates of Chicago, to provide advice on the default fund and other matters.