A reversal in performance from last year’s negative returns, a change in the most popular fund and disappointing results for the Mutual Fund Window are noticeable TSP trends.

Returns

TSP investment returns can quickly change from positive to negative or negative to positive. Short-term returns are often very different from long-term returns.

The F, C, S and I funds were strongly negative in 2022. So far this year, those funds have had strongly positive returns. One trend quickly replaced another.

Many TSP investors worry so much about negative returns that they keep most or all their investments in the G Fund, which never has a negative return but loses purchasing power because of inflation and taxes. Other participants invest based upon historical trends and the historical trends are pretty clear; over longer periods of time, the U.S stock funds (C and S) outperformed the bond funds (G and F).

Returns at the end of March 31, 2023, illustrated how the TSP’s U.S. stock funds outperformed the Bond funds over long time periods but not the previous twelve months.

The three-, five-, ten- and fifteen-year average annual returns were much better for U.S. stocks than bonds. Historically, that’s what we’ve seen over long periods of time, and that’s why stocks have been a good investment for long-term investors. Now, past performance is no guarantee of future performance, but there’s no reason to think that the long-term trends will not continue.

Changes in the Most Popular TSP Fund

For many years, the G Fund was the most popular fund. In August of 2009, almost 50% of assets were invested in G and less than 25% were in the C Fund.

Over time, the percentage in G gradually declined and the percentage in C gradually increased. In 2021, the percentage invested in C exceeded G for the first time. At the end of 2021, 33% of TSP investments were in G and 40% in C. Those percentages reversed in 2022 and once again G has more assets than C.

Source: Thrift Savings Fund Statistics, Federal Retirement Thrift Investment Board, January 2023

This might indicate that TSP investors are buying high and selling low; buying the stock funds after stock prices began increasing in price and selling after stock prices began declining. Or it could be unrelated.

Tom Temin, a broadcaster for the Federal News Network suggested some other possibilities. Perhaps employees reduced bi-weekly investments into C during 2022 and instead invested more in G. Another possibility Tom mentioned is that the C Fund’s negative 2022 returns, combined with the G Fund’s slightly positive returns, caused the value of participants’ C Fund holdings to be cumulatively worth less than the G Fund holdings.

TSP fund allocations on January 31, 2023 were 43% in the bond funds and 57% in the stock funds.

Source: Thrift Savings Fund Investment Review, Federal Retirement Thrift Investment Board, January 2023

Mutual Fund Window

The TSP mutual fund window  opened in June 2022. It allows TSP account holders to transfer some of their TSP funds into a separate investment account. Think of investment funds flowing from the TSP to another investment fund through a window. That separate investment account offers 5,000 different mutual funds from 300 fund families. The amount that can be transferred is limited and fees are high.

According to reports published by the Federal Retirement Thrift Investment Board (which oversees the TSP), as of January 31,2023, participation in the mutual fund window option has been growing but is still quite low.

The number of mutual fund window accounts increased from approximately 1000 last June to almost 3,000. But that is a low percentage of TSP accounts, which exceeded 6,759,000.

The amount invested was approximately $200 million. Again, that is small compared to the $759 billion invested.

In the chart below, the left-hand column shows values for the number of accounts and the right-hand column shows the dollar amount invested per month.

Source: Thrift Savings Fund Investment Review, Federal Retirement Thrift Investment Board, January 2023

Choosing funds in the mutual fund window requires more work and more knowledge than investing in the traditional TSP. It is not easy to research and compare 5,000 different mutual funds and expenses are much higher. But for TSP participants who want access to a wider array of choices, it is a solution. There are many more choices for:  

• Bond funds (long-term, high yield, TIPS, international),
• US stock funds (real estate, small cap, specific sectors, alternatives, environmentally or socially focused, religiously based), and
• International stock funds (emerging markets, specific countries or regions).

How Important Are The Trends?

The first two trends are important. Returns and allocations are the key determinants of the rate of return for participants' TSP accounts. The mutual fund window may affect returns positively or negatively but it seems far less important than the other two trends.

With regards to expected fund perfromance and allocation of funds, TSP investors face the same dilemma as other investors. Should they invest for

• The lower volatility and lower chance of losing principal (“safety”) offered by the bond Funds but with a higher chance of a decline in purchasing power; or
• The higher potential growth historically offered by the US stock funds, accepting greater risk for the opportunity to increase purchasing power.

That is not an easy choice.

Disclaimers:

This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice.  For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.

Keep in mind that:

• Past performance is no guarantee of future performance;
• Inv.estments involve the risk of loss of principal and earnings;
• ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
• “Average annual return” evens out variations in the actual year-to-year returns.
• ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
• None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
• Investments mentioned may not be suitable for all investors.