Defined-Benefit Pension Programs (like your FERS Annuity and/or Military Retirement Pension) are headed the way of the Dodo Bird. Here’s a recent example.
The State of California recently illustrated the difficulty of running a Defined-Benefit Pension program. CALSTRS (the California State Retirement System) is a juggernaut of a pension fund that is designed to support almost 500,000 teachers, state employees, and municipal employees in retirement. Continue reading
During this past week the Federal Retirement Thrift Savings Board (the people who run the Thrift Savings Plan) made moves to tilt L Funds’ asset allocation away from F Fund and into the G Fund.
Why would they do this? The TSP is one of the few Qualified Retirement Plans in the nation who actually takes their customers’ needs to heart and acts on their behalf as a Fiduciary.
According to TSP’s Kim Weaver, “What we’ve determined is given the way interest rates have been remarkably low, we’re going to change some allocations, move it a little bit more to the G fund, a little less on the F fund, a little less on the S fund and a little higher on the I fund.”
The rest of the press releases and interviews with TSP don’t paint the whole picture on the Why’s of dialing-down the F-Fund allocation in all the TSP L Funds. Fortunately for all of you, Mr. Allan Roth, CFP has already illustrated this over at ETF.com/AARP with a recent article.
Mr. Roth points out that the Barclay’s Aggregate Bond Fund (the index fund that represents the entire bond market, which is essentially identical to the TSP’s F Fund) is a terrible investment right now.
As of today, the F Fund/AGG index yields 2.01 percent, with a duration of 5.3 years. Mr Roth’s opinion (which I violently agree with) is that the F Fund/AGG is a ticking time bomb with interest rates at near zero percent. Look at the Duration of the F Fund – 5.3 years. This means that if the Fed hikes rates by 1 percent, the F Fund/AGG drop in value by 5.3 percent. FYI- This is what Bonds and Bond Index Funds are supposed to prevent- They are supposed to provide Buoyancy to your investment portfolio and prevent you from taking a catastrophic loss.
Here’s what happens to today’s F Fund investment if the Fed hikes interest rates:
As an alternative to F Fund/AGG, Mr Roth proposes purchasing a 5-year CD and a 10-Year CD, for a blended rate of 2.62 percent and duration of 4.6 years. The money is government guaranteed (assuming you follow the FDIC single-bank CD investment limit of $250,000 or less) and you have taken on less ‘interest rate risk’ – the loss you would take if prevailing interest rates rise. Mr Roth’s strategy is for you to ‘Break’ the 5-year CD if interest rates rise and take the ‘early withdrawal’ penalty.
If this sounds like an elaborate, active-management strategy to hedge your supposedly safe investments from rising interest rates, it is. As a Fed (or Veteran) participating in TSP, you already have a ready-made investment that does this for you inside the TSP- It’s called the G Fund.
Today’s G Fund rate is 2.00 percent, and the duration is 1 business day (or the time it takes you to make a transfer within the TSP). The G Fund is a unique animal in that it provides TSP participants the liquidity of a Money Market Fund with the returns of government securities with maturities of 4+ years. If you can find a product like the G Fund, please point it out to me. I’ve mentioned here before that the G Fund is the Unicorn of Investing, and I’ve yet to be proven wrong.
Bottom Line: If you’re invested in the TSP F Fund, or ANY of the TSP L funds (all of which contain some percentage of F Fund, depending on your birthday), I’d recommend ‘rolling your own’ allocation and substituting any current allocation in F Fund to G Fund. We can’t have near-zero interest rates forever.
Disclosure: At the time of this article posting I do not own ANY AGG/F Fund and I hold a short position against Long-term Treasury Bonds.
Subscribe to GubMints:
|via RSS:||via Email:|
Happy Memorial Day!
Since the Thrift Savings Plan (TSP) might soon be the cornerstone of the Military Retirement System, I though I’d take some time to highlight some of the attempted shenanigans taking place with the TSP.
I say attempted because it literally takes an act of Congress (that’s the entire Congress) to alter the TSP’s charter/regulations. This is by design, because the TSP is deliberately designed to be apolitical and avoid the business of picking winners and losers. This prevents a Congressman/Senator from creating a fund designed to funnel federal employee retirement savings to his or her district/state/pork project.
Enter Congressman Don Beyer (D-VA). Continue reading