If you recall from last year, I resolved to roll all my IRA assets BACK in the the TSP, based on the following facts and theories:
- (Fact) TSP will soon allow much more withdrawal flexibility,
- (Fact) I’m not smarter than the market,
- (Fact) TSP Lifecycle funds have the lowest fees of any target-date fund, and
- (Theory) TSP Lifecycle funds are the best target-date funds available based on their cash-equivalent fund (the G Fund).
… so how about #4? Any way to prove this theory in to fact?
Well, here are the last 10 years’ worth of returns for Vanguard, Fidelity, and Schwab target date funds with a roughly 70/30 percent stock/bond ratio. (Note that the brokerage houses use date 2030 for a 70/30 mix, while TSP L funds are a bit more conservative, and put a 70/30 mix in its target year 2040). All of the brokerage target date index funds are good choices and have low (<0.6%) fees, but this is still almost 10x the TSP fee charged of 0.038%. With that in mind, TSP’s 70/30 stock/bond fund (L 2040, in green) beats the competition over all periods of 1, 3, 5, and 10-years.
I also put the L 2030 TSP Fund in the table for comparison (in gray) , just to point out that the TSP has a more conservative target-date portfolio for the same retirement year as the brokerage houses. Of note, if you picked the same target YEAR (L 2030) and not the same asset MIX as Vanguard/Fidelity/Schwab, you would have a more conservative asset mix (60/40), yet STILL would have beaten the private sector target date funds for the same target year (2030).
(Note, you can take a look at these target funds individually and check their stock/bond composition plans over the calendar years. For most funds, the stock/bond mix does not change much until you get within about 5-10 years of the retirement date for each fund).
So, what’s the takeaway? Vanguard/Schwab/Fidelity have good target date index funds and low fees, but TSP has 2 strategic advantages over the brokerage house target date funds:
1) If you’re going to go passive, you might as well go passive-agressive and choose the target-date fund that has the lowest fees.
Right now TSP is the winner, hands-down. (Yes, Fidelity Zero is an intriguing option for stock indexes but as of now they still charge fees on their bond index funds).
2) TSP also has a ‘cheat’ within its bond portfolio mix known as the G Fund.
None of the brokerage houses have a product like this. G Fund is money market fund only available to TSP investors that somehow yields the equivalent of a 5-year CD.
Why does this give TSP Lifecycle funds a critical edge?
Beacuse when stocks crash, target-date funds attempt to keep their target stock/bond asset mix in line, and have to sell bonds or money market funds (cash) to buy more stocks while the stocks are ‘on sale’. When these stock market dips happen, G Fund has the most ‘purchasing power’ available of any bond fund because in the words of former TSP director Greg Long, “TSP’s G Fund has never had a bad day”.
So, last January’s Resolution was a good one to keep. There’s no compelling reason for me to switch out of TSP’s Lifecycle Funds, and there’s 4 concrete reasons to stick with TSP.