DigitalPiggyBank

Every year I take a look at the Allocations in my retirement plan Target Date/Lifecycle funds.  I have Qualified Plans with both my (current) private sector employer and funds I left with TSP when I resigned as a Fed a few years ago.  

If you look at the same Target Date (I’m focusing on 2030), the TSP has a much more conservative allocation than the Brokerage houses like Fidelity, Schwab, and Vanguard:

TSP Lifecycle Funds are 10 years behind Vanguard and Fidelity

Looking at the above chart, there are 2 key takeaways:

1)  You have to go out another 5 years to 2035 to get a similar Stock allocation of ~66 percent  (That is, you have to buy TSP L 2035 to get the same Stock allocation as Fidelity/Schwab/Vanguard Target Date 2030).

2) TSP is not using much of the Aggregate Bond Index (AGG or F Fund) for its Bond Allocation – TSP uses mostly the G Fund instead (see the gold-colored bars plotted above).

Q: Why?

Potential Reason #1 : TSP followed the guidance of a 3rd party study that recommended no significant changes to Lifecycle Fund allocations. 

In 2018, FRTIB (the folks who run TSP) commissioned AON Investments to analyze and recommend any changes to the time-phased allocations of TSP Lifecycle funds.   The Bottom Line from this 26-page summary of findings and recommendations is that the L Income Fund is a bit LOW in stock allocation (TSP will gradually increase it by about 1 percent), and that the other Target Date Lifecycle Funds (L 2030, L 2040, etc) have the correct overall Stock allocation glide path, but TSP should gradually tweak the USA-versus-Overseas breakdown (‘C’ Fund versus ‘I’ Fund stock allocation).

TSP Lifecycle Funds are 10 years behind Fidelity and Vanguard

The above slide illustrates stock alllocation (Y axis) among various Target Date retirement funds versus time (age).   TSP time-phased target stock allocations are the Gold line, while the gray lines are Schwab, Fidelity, Vanguard, and others.

The chart shows/confirms that TSP is more conservative with its stock allocations over time…. to the tune of about 10 percent stock underweighting for the same target dates/ages.  You typically have to slide the ‘age’ 10 years to the right for the Age Profile of a TSP Lifecycle Fund to match the same Target Date fund for Vanguard or Fidelity.

Note that in the 2018 L allocation study, AON did not recommend a net change in stock allocation in the ‘Out’ years…. they only recommended re-allocating existing stock proportions  between C (USA) and I (Foreign) funds:

TSP Lifecycle Funds are 10 years behind Fidelity and Vanguard

In the 2018 Lifecycle Funds Study, AON recommended a tweak to the Domestic/Foreign stock split, but NOT a change to overall Stock allocation for target date funds.

Potential Reason #2:  Federal Employees have more sources of retirement  income than the TSP.

The AON Study lists out what the appropriate Risk Factors are to determine Stock Allocation within Target Date Funds. 

 Listed out as one of the top factors (I can only assume this since it is listed at the top and the factors are not ranked) in the AON Lifecycle Allocation Factors study is the availability of a Defined Benefit pension benefit to employees.  Federal employees do in fact have this Defined Benefit pension- the FERS Annuity.

TSP Lifecycle Funds are 10 years behind Fidelity and Vanguard

As most Feds should know, the FERS retirement system is a ‘three-legged stool’  built upon FERS Annuity, Social Security, and TSP.  FERS Retirement does not rely solely on TSP like the private sector relies almost solely on the 401k. 

Therefore, in the eyes of TSP/FRTIB, the TSP does not have to do all the ‘heavy lifting’ for funding an employee’s retirement.   Based on the risk factors listed in the table above, I am assuming that FRTIB/TSP have deliberately made the Lifecycle funds more conservative than their private sector Target Date counterparts.  This is likely because TSP is not the sole source of FERS/Military retirement income and TSP does not have to ‘win the retirement game’ all by itself.

I don’t agree with this reasoning.

If you have read ‘Are you a Stock or Bond’ by Dr. Moshe Milevsky, you already know about the concept of Human Capital.  As a Federal Employee (or Military) your Human Capital is much more ‘Bond’ than ‘Stock’.  That is, you have much more potential over the years to generate a predictable, steady income stream (‘You, Inc.’ are a ‘Bond’) than a small business owner or employee of a small company (‘You, Inc.’ would be a ‘Stock’).

As a Federal Employee or Active Duty military, you will not likely receive a large payout from an Employee Stock Purchase Plan or company IPO during your income-earning years.   For this reason, I would make the argument that you should have MORE in the stock market for the same target retirement date than your private sector colleagues. 

Potential Reason #3: TSP has the G Fund as its secret weapon. 

In recent years TSP went bear-ish on the F Fund (Aggregate Bond Index) since interest rates are at historic lows.  TSP shifted its bond allocation away from the corporate bond market F Fund and over to the G Fund back in 2015.  The G Fund has never had a bad day, and TSP/FRTIB have recently chosen to use the G Fund more than the F Fund as the ‘shock absorber’ in each Lifecycle fund.  By eliminating the downside risk in the bond portion of the portfolio, TSP Lifecycle Funds have more power to purchase stocks ‘on sale’ during market dips.

Related: 4 Reasons TSP G Fund is the Unicorn of Investing

Potential Reason #4:  TSP has a solid track record of providing secure retirements to its participants and does not need to be more aggressive.

In spite of providing lower stock allocations than the private sector for the same Target Dates, TSP has a solid track record of growing its own millionaires.  There are 75 thousand TSP millionaires today, including one known 2 million dollar man-   Abraham Grungold has $2M in his TSP that he earned the old fashioned way, using time and consistent participation through his working years.  

So What’s the Takeaway?

You should know what your desired stock/bond allocation is in your TSP, and why (Hint: Do you feel more like a Stock or a Bond?). 

TSP Lifecycle Funds are a great vehicle, but if you think TSP is being too conservative with your Defined Contribution Plan money, you can add a few years to your Target Date/Lifecycle Fund date to achieve your desired stock versus bond portfolio allocation.   

Related: 4 Reasons TSP has the best Target Date Funds

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