Feds shift billions to safest TSP fund
By Stephen Losey
www.federaltimes.com

Plummeting stocks are decimating federal employees’ retirement savings — and feds are responding in large numbers by pulling their remaining money out of the Thrift Savings Plan’s stock-based funds and putting them into the safer G Fund pegged to U.S. Treasury securities.

The G Fund is the most secure of the five individual TSP funds — payment of principal and interest is guaranteed — although it typically yields TSP’s lowest return.

But not lately. Throughout this year — and especially in recent weeks — the G Fund has emerged to millions of TSP participants as a safe harbor from the worsening financial turmoil.

In September alone, TSP retirement accounts lost almost $10 billion — from $228 billion to $218 billion, the lowest level since March 2007. Also last month, TSP participants transferred $3.5 billion of their savings from other funds into the G Fund — the largest shift of TSP money since January, when participants moved $4.4 billion into the G Fund. January was when global stock markets first started dropping sharply because of concerns over the subprime mortgage crisis.

Although the board overseeing TSP doesn’t yet have figures for activity in October, experts expect plenty more bad news because of sharp losses in U.S. and foreign stock markets in the last two weeks. As of Oct. 9, the C Fund, which tracks the Standard & Poor’s index, had lost 37 percent of its value since January, and almost 41 percent in the last 12 months. Shares in TSP’s S and I Funds — which track small cap stocks and international stocks — fared even worse. By comparison, the G Fund yielded a 4.03 percent return in the last 12 months and a 2.93 percent return since January.

The bleak news prompted the head of the TSP, Gregory Long, to post a rare public letter on TSP’s Web site Oct. 8, urging participants not to panic by shifting all their money out of stock-based funds.

“I view this as a time for prudence, not panic,” said Long, executive director of the Federal Retirement Thrift Investment Board. “History has shown us that stock markets do recover.”

Even people who are about to retire should consider staying invested in stocks, Long said. Retirees who choose to make monthly withdrawals from their TSP accounts will need to manage their portfolios for years or decades after they retire, and stock market investments could help provide much-needed growth, he said.

“Although you may be thinking about retirement in the short term, your TSP time horizon may actually be much longer,” Long said.

Judy Johnson, a program analyst at the Federal Aviation Administration’s Mike Monroney Aeronautical Center in Oklahoma City, was one of those who decided to park all her money in the G Fund in January. After losing about $7,000 over two weeks in July 2007, Johnson started moving money into the G Fund. She experimented with putting small amounts of money in the S or I funds, but lost money each time. She hasn’t transferred any money out of the G Fund since January.

“I’m getting too close to retirement to lose another $7,000,” said Johnson, who is 63 and plans to retire in 2009 or 2010. “It’s a little bit scary.”

Greg Pearson, who retired as a civilian financial management analyst for the Marine Corps in October 2007, said he also put all his money in the G Fund three or four months ago. But the passage of a $700 billion bailout package made Pearson a little bolder about the market, so last week he invested in the I Fund’s international stocks.

“I was real smart,” Pearson said sarcastically. “I’ve taken a real beating on that.” Pearson isn’t sure whether he will move money out of the I Fund or ride it out.

Dan Cott, a 41-year-old computer specialist at the Justice Department, said he’s investing more aggressively because he thinks it’s the perfect time to buy and has time to wait out the ailing stock market. In late September, Cott moved about 15 percent of his funds from the G Fund to the C Fund, where he already had about 30 percent invested.

“I have no doubt it’s going to come back up,” Cott said. “It’s one of those things where people say buy low and sell high.”

Financial advisers interviewed by Federal Times said that it’s probably too late to cut losses by bailing out of the stock market.

“The worst thing for them would be to sell now and secure their losses,” said Dave Ponder, a private financial adviser who advises the National Active and Retired Federal Employees Association. “As of today, you’ll have to ride it out.”

Ponder said that those already in the G Fund should not wait too long before getting back into stock markets. But nobody knows exactly when the market will hit bottom, he said.

“That’s the big question — when do you get back in?” Ponder said. “The problem is people will wait until the media jumps on board and says we’ve hit bottom and now are moving back up. That’s always too late — you’ll miss the upside.”

Financial advisers like Ponder agree that the G Fund has its place as a temporary shelter to ride out periods of market turbulence. But keeping money in the G Fund for the long term is a losing strategy, Ponder said, since that fund only slightly outperforms inflation.

Concerned investors should meet with their financial advisers to figure out how to minimize losses and reallocate assets, Ponder said. He suggested that participants nearing retirement split their investments among the stock-based C, S, and I funds and the F Fund’s bonds. But those participants should never have more than half of their money in the stock-based funds, Ponder said, and should probably lean more heavily on the F Fund.

“They’ll still need a portion of their assets in equities, but they’ll need a financial adviser to help determine how much,” Ponder said.

Frank Boucher, a Reston, Va., financial adviser who works with federal employees, suggested that retiring federal employees lock up part of their savings in the G Fund as a cash reserve to draw from in the early years of retirement. That will allow time for savings in stock-based funds to recover, he said.

But whatever steps participants take, they should not take drastic actions such as repeatedly shifting large sums of money from one fund to another to try to beat the market.

“We’re dealing with a very hysterical market,” Boucher said. “It’s not a good idea to move everything around with big swings.”

And Boucher said TSP participants should remember that their investments are far safer than funds in most retirement plans. The G Fund is a haven that other retirement plans don’t have, he said. And the fact that TSP monies are invested in mutual funds, and not individual stocks, helps to mitigate the damage.

The Congressional Budget Office on Oct. 7 estimated that retirement programs nationwide have lost $2 trillion — about 20 percent of their total value — in the last 15 months.

“This too shall pass,” Boucher said. “It always has. If I had to pick a plan [to be in] today, I’d pick TSP.”