Military Update: Savers urged to consider ‘L Fund’
The number of active duty and reserve component members enrolled in the federal Thrift Savings Plan will hit a half million this month. Recent improvements could encourage many more to join, say plan administrators.
In July, TSP began year-round enrollment, in place of twice-yearly “open seasons.” Open seasons didn’t always coincide with periods of transition, such as boot camp or reassignment, when troops are dealing with personnel offices and opening a TSP account is convenient.
A second, more important change was the introduction in August of “Life Cycle,” or L Fund options. The funds will keep TSP savers on the “efficient frontier of investing” by providing “all of the investment return they should get for the risk they’re taking,” said Gary Amelio, executive director of the Federal Retirement Thrift Investment Board.
The board administers TSP for 1.9 million federal civilian employees and, since March 2002, for the military. While TSP is integral to a healthy retirement plan for many federal civilians, for servicemembers it’s an opportunity to save and invest in quality funds at minimum expense. And though TSP is intended to boost retirement wealth, participants can borrow against accounts at attractive rates to buy a car, finance college or make a down payment on a home.
The Navy leads the services in touting TSP. Through September, 41.1 percent of active duty sailors had TSP accounts versus 30 percent of Marines, 26.6 percent of Air Force members, 25.6 percent of Coast Guard personnel and 18.7 percent of soldiers. TSP popularity climbs with rank. About 55 percent of all field grade officers have accounts compared with 25 percent of noncommissioned officers. Again, the Navy leads. Twenty-nine percent of junior enlisted sailors invest in the TSP, versus just 6 percent of soldiers.
Carl Witschonke, the uniformed services representative to a TSP employee advisory council, provided examples of how the money can grow.
A new recruit who contributes 5 percent of basic pay each month, about $57, and earns a modest return of 7.5 percent annually, will have $83,000 in a TSP after 20 years. If the member retires, making no more contributions, the account still will climb to $440,000 by age 60. If the same member serves another 10 years, still contributing 5 percent of basic pay and drawing a 7.5 percent return, the account would grow to $257,000 at the 30-year mark and to $658,000 by age 60.
A typical officer will accumulate $163,000 in 20 years, which would grow to $643,000 by age 60. If the officer stayed in for 10 more years, TSP would climb to $483,000 by the 30-year mark and reach $927,000 by age 60.
Until August, TSP offered five investment funds, listed here with average annual returns over the last 10 years: Government Securities Investment or “G” Fund (5.75 percent); Fixed Income Index Investment or “F” Fund (7.72 percent); Common Stock Index Investment, or “C” Fund (11.99 percent); Small Capitalization Stock Index Investment or “S” Fund (11.84 percent) and International Stock Index Investment or “I” Fund (5.45 percent).
Amelio, when he became executive director in June 2003, wanted to address two problems. One was that 52 percent of all assets were invested in government securities, the G Fund, which isn’t intended for long-term investing. Military savers are particularly cautious, with 57 percent still keeping 100 percent of their TSP accounts in the G Fund.
“It won’t provide the kind of capital growth needed over a 20-, 30-, 40-year time horizon to provide a more comfortable retirement,” Amelio said.
His second concern was that TSP investors were “overwhelmed” by the fund choices and uncertain how to allocate assets effectively.
“Most participants are not investment professionals. They don’t have the time to read up on everything and make intelligent decisions,” he said.
His solution to both problems, Amelio said, is the new Life-Cycle or “L” funds. To create them, Amelio hired investment professionals to mix five existing TSP funds in combinations that maximize returns and minimize risk based on when investors expect to retire and start to draw down TSP. L Funds have been explained in marketing materials and at the TSP Web site, www.tsp.gov.
Soon participants will receive a CD too to understand how they can shift accounts into just one L Fund and leave it there. The key is professionally prepared asset allocation models that diversify investments so TSP investors don’t have to, Amelio said.
For example, TSP enrollees expecting to retire by 2008 are encouraged to move all assets to the most conservative L “Income” fund, which initially keeps 74 percent of total assets in the G fund, 12 percent in the C fund, 6 percent in F fund, 5 percent in I Fund and 3 percent in the S fund.
Young investors with time horizons of 30 years or more are encouraged to move all TSP assets to the most aggressive “L 2040” fund. The number is the approximate year of full retirement and, thus, the year when the fund matures. Others L funds are for 2010, 2020 and 2030.
L Fund assets are adjusted daily to maintain the planned mix. Every quarter, however, the asset allocation will be adjusted slightly to become more conservative because retirement is drawing nearer.
“The L funds are particularly suited to young military members who don’t necessarily want to make investment decisions but want to have their money working for them as effectively as possible,” said Witschonke.
Amelio said he expects up to 80 percent of TSP participants to move into an L Fund as they come to know its advantages, the big one being “professional money management for virtually no cost.”
To date, he said, military investors are leading the way with 4 percent invested in an L Fund versus 3 percent from among TSP civilians.