TRANSCRIPT:

Jeremy: So across the country we get a lot of federal employees that ask, “Well what funds should I choose? How do they work? What are they made up of?”

One of the things that we make a point not to do is actually recommend one specific fund over another because every individual has different points in their career. Their needs change, the risk tolerance change, things like that, and their goals change. What we aim to do is really educate the federal employee on what the funds are, how do they work, what are they made up of, the risk tolerances, and really where to find more information.

So Matt, can you tell us a little bit about what fund options do we have inside TSP?

Matt: Yeah, first of all, I will say that we always want to guide people to TSP.gov. They have great information on the funds and different charts and stuff that you can read to get really detailed on it. But the first fund inside TSP is the G Fund, and it is the only fund –the only fund– in TSP that is fixed. That’s an important word because that means any money that you’ve put into the G Fund and any money that it has grown, you cannot lose. So it is the only fund inside TSP that cannot go negative. You cannot lose money in the G Fund. It’s only issue to TSP, it’s government security’s issue to TSP, and it’s got a pretty good return for a short term fixed fund. The rest of the funds are all variable funds. That means they can lose money based on the market.

The F Fund is the next fund and it’s considered safer than the rest of the funds because it’s bonds, it’s got government corporate, mortgage backed bonds. But you do have volatility there based on interest rates. There’s a lot of things that come into play on the bonds, but it’s traditionally more stable than the rest of the funds (the C, S, and I). The C Fund, your index to the market, is the S&P 500, they’re medium to large size companies in the US; so they’re more your blue chip, your more solid US based companies. The S Fund is also US companies but they’re more medium size, a little bit more aggressive here. In the I Fund, you’re actually invested in companies and corporations overseas in 21 developed countries.

Also, lastly, a few years ago, they came out with the L Funds. The L Funds are kind of confusing because they’re not their own fund, they’re a blend of the five funds here: the G, the F, the C, the S and the I Fund. You can choose the L Fund that makes sense for yourself. All it is a combination. You can pick like the L 2020, L 2030, L 2040 and now the L 2050, and all you’re doing there is picking the horizon and it’s on an algorithm where it’s automatically reallocating your funds to become more and more conservative, which we’ll talk about in a little while. So the L Fund is the G, the F, the C, the S and the I Fund, and you have different L Funds that you can choose from.

But Jeremy, these funds are extremely cheap, so go into a little bit of details about the funds here.

Jeremy: Another thing to note are the fees for all the funds. That’s not a typo. That is .029%, which is basically nothing. I think we’ve talked about the match and what a great benefit it is for the Thrift Savings Plan, and a great benefit it is for a federal employee investing money. The first 5% ought to go into the Thrift Savings Plan, right, because again…we’re talking about doubling your money, correct? But there’s a tremendous argument on anything over and above the 5%, just because of these fees. If I’m trying to go out in the outside world, in the private world outside of a 401k or doing an individual IRA and having to go through an investment advisor or something like that, the fees may be upward of 1 to 1.5%. This is a tremendously cheap program that the federal employees have access to and it’s just something that we definitely want to make a point to mention. Very cheap funds and can pay dividends over time.

We’ve talked a little bit about the details of each fund and kind of what they’re made of and how they work, and we’ve also mentioned that some are extremely conservative, being guaranteed; and some are a little bit more volatile. Tell us what that means and what these funds performance looks like, Matt.

Matt: Well, according to TSP.gov, if you look at the returns of each one of these funds, the first thing I want to point out to emphasize what you said, the G Fund is never lost money. If you look at from 2008 to 2017, if you go back to the inception of the G Fund, it’s not gonna be red. Any of the red numbers that you see, that means that’s what it lost that year. But if you look at the average, it’s been 2.38%. So you’ve got a good safe return there. Now some of those can tell you what the returns are. The G Fund, you don’t know what the return’s gonna be. It can change every year, but you’re not gonna lose money.

The rest of the funds, you can see at least one year in the last 10 years where they’ve lost money. The F Fund lost money in 2013. Its average is a little higher than the G at 4.27%. The C Fund is averaged 8.55 the last 10 years. The S Funds actually been the best at 9.37, that doesn’t mean it will be the best the next 10 years. The I Fund has not performed very well, 2.23 has been the 10 year average on the I Fund. Typically, the more aggressive a fund is, the higher return opportunity long term you’re gonna have.

So the G Fund is your safe fund, the rest of the funds are gonna lose money. Now why is this important? Again, we’re not telling you where to put your money; but let’s say for an example like in…past 2008, or if we go back to 2001, 2002, you can continue to go back, the market has periods where the market drops. If you’re about to retire during one of those periods, it can make a big impact on your retirement. So if you’re getting closer to retiring, talking about the L Funds, the reason why TSP automatically puts more and more of your money back into the G Fund, is to protect the nest egg that you’ve built inside TSP as you get closer to retiring. In fact, I think if you pick the 2030 like you said, in the year 2030, I believe they have 74% of your money in the G Fund.

Jeremy: That’s correct.

Matt: So only 26% of it is at risk at that point, that’s TSPs guidance on automatic fund. So if you’re about to retire, it’s important to start protecting your money.

Jeremy: How far out from retirement would you actually look at that?

Matt: Great question. Everybody is different, depends on your risk tolerance. It’s good as you get closer and closer to retirement to take more and more of your retirement money and reposition it or position it in a safer spot that you can start protecting it and protecting this asset that you’re building.

Jeremy: The G Fund is a good spot for that while you’re working, correct?

Matt: The G Fund is the only fixed fund inside TSP, not to say the others are bad, but that is the only fixed spot. The rest of the funds can lose money. Now let’s go the flip side, let’s say you’re young and you’re just now getting into the federal employer. You’re a new federal employee. You can take the losses, if you have a 2008 and you’re in your second or third year, it’s okay ’cause you have plenty of time. So we’re gonna talk about that in a minute. But having your money in more aggressive funds when you’re younger is traditionally the advice that’s given. As you get closer to retirement and you want to start protecting what you’ve built.