A Year in the Life-Cycle Funds

On Aug. 1, the Thrift Savings Plan will celebrate the one-year anniversary of its newest investment offering: the life-cycle (L) funds.

The L funds are a blend of the five basic TSP funds -- international stocks, small and large domestic stocks, government securities and fixed-income bonds -- that automatically shift participants' money from a mix of riskier to more conservative investments as they age.

About 330,000 participants grabbed onto the L funds idea, pouring almost $12 billion into the funds. About 7 percent of employees in the older Civil Service Retirement System participated, along with 9 percent of those in the Federal Employees Retirement System -- which relies more heavily on the TSP for retirement savings.

TSP Executive Director Gary Amelio said those numbers have "simply blown the doors off of our wildest expectations."

So far, the 330,000 employees in the life-cycle offering have made a wise choice. Since their inception, all of the L funds have outperformed both the government securities (G) fund and the common stocks (C) fund, where the bulk of TSP participants' money is invested.

The L 2040 fund, which is designed for participants with an expected retirement date around the year 2040, had an 8.98 percent rate of return since its inception. The L 2030 fund had an 8.28 percent return. The L 2020 earned 7.77 percent, the L 2010 6.93 percent and the L Income, designed for employees with planned retirements in the very near future, had a 5 percent rate of return.

By comparison, the G Fund posted a 4.38 percent return in the same period, and the C Fund gained 4.59 percent.

Of course, the L funds' mix of conservative investments to counterbalance more volatile funds means they won't likely reach the heights of successful risky investments.

International stocks posted a 22.10 percent return since last Aug. 1. Even the riskiest L fund, L 2040, puts only 25 percent of its money into the I Fund.

The I Fund has been up and down, though, earning 4.83 percent in April and then losing 3.87 percent in May, for example. Some participants have been chasing the I Fund's returns, pulling out of it when it loses money and then reallocating money into the fund on the upswing.

The TSP's board and staff have warned participants against such tactics. In June alone, there was almost a $4 million trading cost on the I Fund because of about 215,000 such chasers.

"Because of the volatility in the markets, a lot of the participants panicked and kept pulling the trigger," said Tracey Ray, the TSP's chief investment officer.

"That's what these L funds are intended to prevent," Amelio said.

Investing in the L funds takes the trigger out of employees' hands, for better or for worse, and puts them on a longer-term investment horizon.