TSP life-cycle investors won’t let go of other funds

Many investors in the Thrift Savings Plan's life-cycle funds are tempering their effectiveness by continuing to invest in traditional stand-alone funds too, officials said at a board meeting Monday.

The 401(k)-style retirement savings plan for federal employees began offering life-cycle funds in August. The funds automatically move from a more aggressive to a more conservative mix of investments as participants approach their target retirement dates.

But TSP officials said they are finding that 55 percent of participants still have money in at least one of the five stand-alone funds too. The life-cycle funds were designed to hold the entire balance.

The most striking number may be this: 16 percent of life-cycle investors also have money in all five of the TSP's stand-alone funds. Those funds are the government securities (G) fund, fixed-income securities (F) fund, common stocks (C) fund, international stocks (I) fund and the small- and mid-sized companies (S) fund.

Six percent of life-cycle participants also have money in four stand-alone funds, 11 percent have money in three, 9 percent have money in two and 13 percent also have money in one additional fund.

One of the primary reasons TSP officials developed the life-cycle option was to wean participants from their overdependence on the G fund. That fund has no risk because its returns are guaranteed by the government, but it also doesn't offer an opportunity for the high returns that are important to funding a comfortable retirement.

Participants still seem attached. Of investors with one stand-alone fund in addition to the life-cycle option, 74 percent were in the G fund.

That instinct is understandable, said Andrew Saul, chairman of the TSP board.

"[The G fund] is such a great investment, let's be honest," Saul said. "It gives you such a great rate at no risk at all. So you'll always have more investors in the money market than you would in other plans."

There is another reason the G fund may still be popular, said Gary Amelio, executive director of the TSP. 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 that fund.

TSP officials said they will consider sending targeted educational mailings to investors who are using the life-cycle funds improperly.

The good news is that 95 percent of life-cycle investors are putting their money into just one of the five life-cycle options, as intended. The TSP offers distinct life-cycle funds for federal employees planning retirement around the year 2040, 2030, 2020, 2010 or in the next few years. Employees are meant to choose the one that most closely matches their target retirement date.

Participation in the life-cycle funds has been very strong. To date, about 214,000 investors have poured $7.3 billion into the funds. In less than five months, those figures already have surpassed the TSP board's goal for the first year.