TSP to Increase Stock Holdings Across Lifecycle Funds

The federal government’s 401(k)-style retirement savings program will increase the proportion of some participants’ investments that are in stocks with an eye toward growing the amount of money annuitants receive after they retire.

At a meeting of the board that administers the Thrift Savings Plan on Monday, agency officials outlined a 15-year strategy to increase the proportion of equities in the lifecycle (L) funds, which shift toward more stable investments as participants get closer to retirement.

Currently, TSP lifecycle funds begin at 90 percent stocks, and the percentage of stocks decreases as the participants in the funds approach their target retirement date, dropping to 50 percent as a participant reaches the age of 60, and ultimately settling at 20 percent at age 62.

Under the new investment plan, known as a glide path, the next L Fund to open—L 2060—will begin with 99 percent of contributions invested in equities. It will maintain that percentage until the average participant reaches age 35, at which point investments will begin to shift toward securities. When the average participant is age 58, the fund will be 60 percent stocks, and it will bottom out at 30 percent equities at age 63.

“This proposal will improve outcomes for L Fund participants while not unreasonably increasing risk levels,” said TSP Chief Investment Officer Sean McCaffrey. “[The 15-year] transition plan minimizes the disruption for participants.”

Existing accounts will maintain their current equity-to-securities ratio until they intersect with the new glide path, at which point they will shift towards securities investment at the new rate. For instance, the L 2050 is currently 80 percent invested in stocks. Instead of continuing on its previously planned trajectory, it will remain at 80 percent equities until 2020, when it will intersect with the new glide path and decrease along with it accordingly.

Additionally, the L funds will increase the proportion of stock holdings that come from international equities from 30 percent to 35 percent.

Russ Ivinjack, senior partner at Aon Hewitt, who consulted with the TSP on L Fund asset allocations, said that because the TSP is one leg in the “three-legged stool” along with a defined benefit pension and Social Security, it can afford to take on more risk.

“Having a defined benefit, we see that as a bond or a cash-like allocation,” Ivinjack said. “This allows you to take more risk. Additionally, there is a great degree of income predictability, whereas if you look at industries that are highly cyclical or where the pay varies highly, you want to be more conservative.”

The TSP has always had a more conservative investment profile than privately run 401(k)’s, but in recent years, those funds have become more aggressive in their investments, making the gulf more stark, Ivinjack said. The new glide path will bring the TSP closer to the investment practices of other retirement programs, but it will remain more conservative than its private sector counterparts.

McCaffrey said that his staff will continue to study the issue on an annual basis, and suggested there could be additional tweaks to the L funds as the staff collects and studies data on the new glide path during implementation.