In this article we will be covering the TSP G Fund (“the Fund”) which is an individual fund offered under the Thrift Savings Plan (there are a total of five individual funds available).
We will be answering the following questions:
- What are the requirements to invest in the Fund?
- What is the investment objective of the Fund?
- If I invest in the Fund, what returns can I reasonably expect?
- What kind of risk profile does a typical investor in the Fund have?
- Why should I invest in the Fund?
- Is there anything I should be aware of before investing in the Fund?
What are the requirements to invest in the Fund?
The TSP program is a component of the Federal Employees Retirement System, and thus most federal employees are eligible to participate in the Fund. The official TSP site contains the full details on the precise eligibility requirements.
What is the investment objective of the Fund?
The ‘G’ in the G Fund refers to government securities and thus the Fund invests exclusively in nonmarketable short-term United States Treasury securities, which are guaranteed by the government. Treasury securities are globally considered to be ‘safe haven’ securities, as they are issued directly by the government and thus are rated as credit default risk-free (because the Federal Reserve can always print more money to repay investors). The official objective of the Fund is to produce a rate of return above the inflation rate while avoiding exposure to credit risk and market price fluctuations.
If I invest in the Fund, what returns can I reasonably expect?
The rule of higher risk for higher returns applies here and as the Fund has no default risk, it commensurately also has the lowest returns. The Fund’s interest rate is calculated based on the weighted average yield of all outstanding Treasury notes and bonds with a maturity of 4 or more years. This is despite the fact that the Treasury securities issued to the Fund have 1-day maturities, meaning that the Fund’s securities have long-term interest rates for short-term maturities.
You can view the Fund’s historical returns over various time periods in the table below:
What kind of risk profile does a typical investor in the Fund have?
As the Fund has no credit default risk, it is the safest kind of investment possible, other than cash. If an investor is allocating a significant percentage of his investment portfolio into the Fund or Treasury securities, then the investor’s risk profile could be characterized as highly conservative. Growth will likely not be the objective of said portfolio, but rather wealth protection.
Why should I invest in the Fund?
1. The Safe Component of your Investment Portfolio
As it is a practical certainty that you will not lose the nominal amount invested in the Fund, the portfolio allocation into the Fund will comprise its least risky part. Even if you want a portfolio targeted toward more balanced returns, it is generally advisable that a portion of the portfolio is invested in low risk assets, and it doesn’t get any lower risk than the Fund!
2. You Already Have Sufficient Lifetime Savings to Last Through Retirement
If you have calculated that your savings will be sufficient to last you through your retirement, then it is reasonable to focus your portfolio on wealth protection as opposed to growth. In that situation, investing into the Fund is a great option.
3. Bearish Market Conditions
Even if you have an investment portfolio focused on growth, there may be certain time periods where market conditions are simply not conducive to achieve that objective. Hence, it may be wise for you to increase the allocations to the Fund during such bearish market periods, and then reallocate to higher return funds once market conditions turn more bullish.
4. Lower Expenses Compared to Other Higher Risk Alternatives
Unlike the other TSP Funds which can be replicated by the public through various other index funds, the Fund’s securities are exclusive to the TSP. The closest proximity would be stable value funds, or buying Treasury securities directly via auction. Stable value funds’ principal amounts are guaranteed by a life insurance company, meaning that although technically principal-protected, there is still a small amount of default risk greater than investing in the Fund. Further, expenses are also higher compared to the Fund, which has an expense ratio of only 0.029% (i.e. a cost of only 29 cents for every thousand dollars invested). In contrast, Treasury auctions have to go through a bank, broker, or dealer (which will impose their own fees) while stable value funds have much higher expense ratios (Vanguard’s Stable Value Fund has an expense ratio of 0.39%, over 10x higher).
Is there anything I should be aware of before investing in the Fund?
There are 2 important things you should know before investing in the Fund:
1. You May Still Lose Wealth in Real Terms Due to Inflation
While the nominal value of your investment in the Fund is guaranteed, your investment may still lose value in real terms due to inflation risk. While the objective of the Fund is to produce returns in excess of the inflation rate, it does not always manage to achieve this. The table below shows the average inflation rate in the United States from 2011 – 2015 in contrast to the Fund’s historical returns.
Inflation data sourced from http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp
As you can see, our of the past 5 years, the Fund only managed to achieve its objective of providing a rate of return higher than the inflation rate 60% of the time. Hence, investors in the Fund would have lost a little value in real terms during 2011 and 2012. While the percentage amount is small, it is still an important point to consider.
2. Lack of Flexibility
TSP Funds lack flexibility in general. For example, the TSP only allows a maximum of 2 interfund transfers per month (unless transferring into the TSP G Fund) and there are many restrictions in withdrawing from the TSP itself, including but not limited to:
- Income taxes payable upon withdrawal.
- 10% early penalty tax on hardship withdrawal, plus a restriction on making contributions to your account for a 6 month period after.
- Maximum one partial withdrawal allowed after leaving government service; only full withdrawal options available after that.
You may find the full list of withdrawal conditions at: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals
We appreciate your time in reading through this article and we hope you found it helpful and informative in helping you understand the TSP G Fund better in the context of your investment and retirement plans. Please also take a look at our other articles on the TSP Funds to learn more about them. See the TSP S fund page.