TSP Lifecycle L Funds
There are lots of financial consultants and advisory services who advocate an aggressive asset allocation strategy, maybe even dynamic inter fund transfers, for federal employees enrolled in the Thrift Savings Plan. While the TSP Board’s recent ruling on interfund transfer restrictions virtually eliminates day-trading, there are still avenues open for TSP investors looking for higher performance from their portfolio. What remains unsaid here is that the Lifecycle, or L funds, provide a simple and safe way for allowing TSP contributions to grow within a planned asset allocation strategy, without any need for active management or investment advisors.
Each L fund is comprised of a mix, or percentages, of G, F, C, S or I funds. L funds typically are created to match with retirement dates. All you need to do is select the L fund which has a target date closest to your estimated, or anticipated, retirement date. Expert financial planners for federal funds have calculated and assigned asset allocations to each of these L funds designed to maximize returns based on the time period between entering the fund and retirement. Each day, the L fund allocation is rebalanced, and each successive quarter it is further rebalanced to reflect a more conservative and less risk prone mix. In addition, each fund is reviewed periodically by a panel of experts based on performance and other relevant metrics.
The L fund has the advantage of being planned to provide maximum returns, without the hassle, risk or costs of an actively managed fund. In addition, the L fund comes at no additional cost, the only expense being that associated with the underlying TS funds.
TSP participants often come up with some part of the investment in an L fund and the remaining portion being spread over a more aggressive fund allocation, in order to not only play it safe, but also try to take advantage of market timing. Some even go for multiple L funds, such as a mix of L 2020, L 2030 and L 2040. This is a very dangerous, and often misguided, strategy for building up a retirement fund.
The basic concept of the L fund is to maximize returns based on your retirement date, within the constraints of reasonable risk tied to market swings. If you exceed this brief, you risk seeing the portion of your investments outside the L fund most suitable for you being wiped out, or not performing as per expectations. It can take years to recover from such a loss. Unlike the G fund which invests in short term US treasuries and offers guaranteed principal but relatively smaller returns, the L fund does have a higher rate of return which is sufficient to cover your entire post retirement life costs.
It does free you of the hassle of selecting and monitoring your investments, but please note that unlike the G fund, no returns are guaranteed for L funds. You are advised to consult a trusted financial advisor, at least once, before you agree for an L fund.