Life-cycle funds could become TSP default option

Greg · 10-18-2005, 02:28 AM

from GovExec

Life-cycle funds could become TSP default option

By Karen Rutzick
October 17, 2005

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.

Greg · 10-18-2005, 02:32 AM

"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. :shock::%:@:*:h

L-funds Return since 08/01/2005 - Date that L-funds were started as 17OCT05 COB
L2040-1.57%
L2030-1.39%
L2020-0.98%
L2010-0.47%
L-Inc0.17%

**bkrownd** · 10-18-2005, 03:49 AM

Surely you aren't trying to suggest that returns since just 8/1 are a good way to judge the L funds? (To look at it another way, those negative signs mean the shares are more of a bargain now.)

It is an interesting question whether the L fund allocation model will perform well over the next 20-30 years, or whether they'll tweak it as the times change. However, as far as I can see it's hard to argue against encouraging diversification.

Sr · 10-18-2005, 04:31 AM

as far as I can see it's hard to argue against encouraging diversification.

Aha, that depends on 1) your definition of asset class worth diversifying in to being just Four 2) MPT being applicable in global market where Irrational exhuberance is the norm3) alternate view that concentration rather than diversification leading to wealth ( Ask Bill Gates et al) 4) World of Finance not being the same over the next 30 years as it was when Dollar was the God's currency.5) TSP opened up to public at large(starnger things have happened) and then even index funds becoming bloated far quicker than regarded as prudent.

**bkrownd** · 10-18-2005, 04:40 AM

:%

**Quips** · 10-18-2005, 12:58 PM

It would be outrageous if TSP automatically determined asset allocation rather than letting the individual do it.

For one thing it borders on invasion of privacy; for TSP to automatically invest one's assets would infer that TSP is looking into one's personal information (age). What gives TSP the right to do that? What will they access next? And if TSP was allowed to do it, what other agency or company would be exempted to access that private info?

The article points out that -- generally -- most people who do not make that decision for asset allocation are those who do not contribute to the plan, but receive the 1% agency contribution.That's about 250,000 peoplewho do that.

What if they did such a thing to the Social Security fund? How about if a choice wasn't given to those -- virtually everybody -- who are under that system? What if itsasset allocation was determined by the individual's age.

It would amount to something between a private account and what it is now.

That would be interesting if not also dicey since the median age would determine asset allocation of the system as a whole.

It would be extremely interesting come retirement time during bull and bear market cycles. Rather than a three legged stool -- social security, IRA, retirement check -- one better be prepared for a freaking four legged freaking chair. What the hell the fourth leg would be, hmmmmmmmm.It would benecessary during bear markets.

It would be revolutionary.

**bkrownd** · 10-18-2005, 03:49 PM

"Outrageous?" What the XXX are you talking about? TSP ALREADY makes a default allocation choice for you - 100% G-Fund. It would be outrageous for most people to leave it that way for very long. Why not let them make a more sensible default allocation choice?

I'm totally befuddled by your worry about TSP knowing our age. They already know our social security number, address and our income. Who cares if they know what our age is, of all things? Actually, I'd be really surprised if they don't already, but the point is nobody in their right mind would give a hoot.

This whole thread is becoming very loony.

**Quips** · 10-18-2005, 04:46 PM

What good are private accounts that are not private, i.e. when the decisions made about them are not one's own?

**mlk_man** · 10-18-2005, 05:05 PM

Have to agree with bkrownd here. At least the letting TSP put your money into the L funds based on age part. I know a lot of people who have been sitting in the G fund for years and missed out on a lot of money. I realize that ignorance is not an excuse, but many people just don't know anything about investing their own money. Plain and simple. Been there done that.

One girl I know had her money in a 401K at her work and they, the fund manager I reckon, had her in sitting in their own money market fund and making -.02 to .03% every quarter since the beginning of her employment. She even lost .06% in 2003. How the heck do you do that? NOBODY lost money in 2003!I took over in July of last year and made her over 15% last year and she's currently up 6.3% this year. She's quite happy. All I'm getting out of it is her friendship. That's enough I guess...............

Anyway, I do believe the L fund is better than sitting in the G if you're not going to do anything with it. When one first signs up they might see "guaranteed 4% return" and think the G fund is the way to go.

JMHO

**bkrownd** · 10-18-2005, 11:08 PM

Quips wrote:

What good are private accounts that are not private, i.e. when the decisions made about them are not one's own?

How is the current default of 100% G Fund any more a participant decision? Anyone who doesn't take the responsibility to set their own allocation doesn't have any moral authority to complain about the default, anyway.

**bkrownd** · 10-18-2005, 11:15 PM

mlk_man wrote:

One girl I know had her money in a 401K at her work and they, the fund manager I reckon, had her in sitting in their own money market fund and making -.02 to .03% every quarter since the beginning of her employment. She even lost .06% in 2003. How the heck do you do that? NOBODY lost money in 2003!

Let me guess...fees, fees, fees?

**Quips** · 10-19-2005, 12:19 AM

bkrownd wrote:

Quips wrote:

What good are private accounts that are not private, i.e. when the decisions made about them are not one's own?

How is the current default of 100% G Fund any more a participant decision? Anyone who doesn't take the responsibility to set their own allocation doesn't have any moral authority to complain about the default, anyway.

There is no risk to lose money in the G Fund as there is no risk to lose money in the money market fund(s).

However, if decisions are made about one's private account without one's permission, it invites a very good chance of a lawsuit, just as shareholders have sued companies for malfeasance, i.e. Rite Aid, Enron, Merck, etc. etc. etc.