What’s the Deal with TSP L Funds and their new updates?
Unicycles, bicycles, lifecycles – The Thrift Savings Plan (TSP) Lifecycle (L) Funds are evolving again. Beginning on July 1, 2020 the L Funds are going through some changes. Here’s the lowdown on what the L Funds are, how they are changing, and a bonus benefit you might not have considered.
TSP has core funds and lifecycle funds you can invest in. The five core funds are:
- Government Securities Investment (G) Fund – invests in short-term U.S. Treasury bonds.
- Fixed Income Index Investment (F) Fund invests in government, corporate, and mortgage-backed U.S. bonds.
- Common Stock Index (C) Fund – invests in large companies that trade on U.S. Stock Exchanges.
- The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund.
- International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries.
Each of the TSP L Funds, sometimes called target date funds, are designed to meet your needs based on when you plan to tap your TSP retirement savings. If you plan to start spending your TSP savings starting in 2030, the L 2030 Fund is designed for you. You can choose whichever L Fund that matches your situation. New servicemembers in the Blended Retirement System that do not make a choice will automatically be put in an L Fund based on their age.
When choosing an L Fund year, pick a fund target date that matches the year you plan to start spending your TSP savings. This will most likely NOT be the year you could retire from the military. In most cases, if you draw from TSP before age 59 ½ you will pay a 10% penalty. Very few servicemembers will be allowed to serve long enough to retire after that age. Your fund target date maybe the year you plan to finish second career or when you become eligible for Social Security in your mid-sixties.
Each L Fund is made up of the five core TSP Funds—G, F, C, S, and I—in different proportions. The L Funds are target date funds, meaning the proportions of the core funds in each L Fund automatically adjust (also called a “glidepath”) as you get closer to the year you plan to retire (your target date). The L Funds are set up based on the idea that when your retirement is far in the future, you can take more risk (market ups and downs), while seeking greater reward (higher growth in value). You have time to recover from any market downturns before you’ll need your money. When your target date is close, you may want to be more conservative (lower risk, lower rewards) with your investments.
To make the gradual adjustment from riskier to more conservative investments on your own, you can regularly shift some of the money in your TSP account from the more aggressive C, S, and I Funds to the more conservative G and F Funds as you approach retirement. The beauty of the L Funds is that TSP does all that work for you, it’s “fire and forget”.
What is changing?
More choices! TSP is introducing six new L Funds to the lineup.
Right now there are four L Funds in ten-year increments – L 2020, L 2030, L 2040, L 2050 and the L Income Fund. When a target year arrives, it is rolled into the L Income Fund, the most conservative L Fund designed for your retirement years. So, July 1, 2020, the L 2020 is being retired. On that date TSP is also adding five new funds: L 2025, L 2035, L 2045, L 2055, L 2060, and L 2065. The five-year intervals give you more options to more closely match your investment time line. Also, the new L 2055, L 2060, and L 2065 are designed for our youngest servicemembers with long saving horizons.
As you can see in this chart, L 2065, L 2060, L 2055 will be invested 99% in higher risk/higher reward stocks (C,S,I Funds) and just 1% in less risky/lower reward bonds (G and F Funds). L Funds with sooner target dates have less risk. The L 2025 Fund will be invested in 50% stocks (C,S,I Funds) and 50% bonds (G and F Funds). Each month, TSP adjusts the proportions of each L Fund to gradually become less risky as the target date approaches. For example, the investment proportions of the L 2050 Fund will gradually change over time so that in 20 years it will look like the L 2030 Fund in the chart above.
More aggressive. In the past, the TSP L Funds were sometime criticized for being too conservative compared with outside target date funds and didn’t consider service members may also get a pension. In response, beginning July 1, 2020 all the TSP L Funds proportions will gradually change to invest a bit more in stocks (C, S, I Funds) and a bit less in bonds (G and F Funds). The percentage of stocks in the L Income Fund will gradually rise from 20% to 30% over a 10-year period. For the funds in between L 2055 and L Income, the stock allocations will not increase on July 1, 2020, but they will be frozen until they eventually come in line with the glide path planned for the newest L Funds.
More international. Starting April of this year, all the L Funds now have a slightly higher allocation of international stocks (I Fund) than they used to. One planned change to include stocks from less developed (emerging market) countries in the TSP I Fund had been put on hold. Watch for more news on that later this year.
Bonus L Fund Benefits
Hands-off rebalancing. Another great feature of the L Funds is that by design they are constantly taking advantage of changes in the market to buy low and sell high. As we’ve already seen, each L Fund has a certain target proportion of the five core TSP Funds. As markets go up and down, the value of each core fund changes. For example, this year when markets initially reacted to the Coronavirus, the C, S, I Funds’ values dropped significantly, while the G and F Funds held pretty steady. In order for the L Funds to maintain their target proportions, the L Funds had to sell some G and F Fund bonds to buy the now lower priced C, S, I Fund stocks.
A few months later, when the markets went back up, they sold back some of the C, S, I Fund stocks at a profit and put that money back into G and F Fund bonds. This is known as “rebalancing”. The TSP L Funds make these buy and sell adjustments every day. Over time this maintains the funds target riskiness (proportions of the core funds), while earning a higher return than if they had just bought once and held those investments. If you own just the core TSP Funds, you can log into TSP and do your own rebalancing. But you can only rebalance among all the funds two times a month. The L Funds do this for you every day, hands off.
Overall, TSP L Funds are a great choice for anyone who just wants to choose a plan once and let the TSP experts do all the work. Decide what year you think you will begin spending your retirement savings and choose an L Fund closest to that year. If your plans change or you decide you want to be more hand-on, you can log on and make changes to your TSP anytime.