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| Q1: |
I understand the TSP has introduced a new type of investment fund. What is it? |
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Beginning August 1, 2005, the TSP is offering “lifecycle funds.” Lifecycle funds are “target asset allocation funds.” These funds have a mix of investments of different types and characteristics, such as domestic stocks, international stocks, and bonds. The mix is chosen based on the date when you will need to use your money. If that date is a long time from now, the lifecycle fund in which you are invested will be more heavily weighted toward equities (stocks or stock funds). As the date you will need your money gets nearer, the allocation will be weighted more heavily toward fixed income or stable value investments (e.g., bonds or bond funds, Treasury securities). |
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| Q2: |
What is the assumption underlying lifecycle funds? |
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The assumption underlying lifecycle funds is that participants with longer time horizons for investment are both willing and able to tolerate more risk (up and down swings in an investment portfolio) while seeking higher rates of return. A further assumption is that as participants approach the time when they will begin to withdraw their assets from the Plan, their portfolios should be adjusted to reflect a lower tolerance for risk. Thus, a young person who is many years from retirement would invest in a lifecycle fund containing investments with higher risk and higher potential returns (such as stocks), and less in low-risk, lower-return investments (such as Government securities). The investments in each fund would adjust gradually and automatically to low risk portfolios as the fund's time horizon approaches. This process is referred to as asset reallocation. |
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| Q3: |
Why does the TSP want to offer lifecycle funds? |
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Studies have shown that many 401(k) participants do not have the time, interest, or experience to manage their accounts. As a result, they may take too much risk for the returns they receive. They could either achieve better returns with the same amount of risk, or they could receive the same return with less risk. Our analysis of the data shows that some TSP participants appear to either be “chasing” the latest returns or leaving their accounts unattended altogether, never adjusting the allocation of their portfolios. Some participants leave their entire account in the most conservative fund, the G Fund, when they may need the higher potential returns of the other funds to give them the retirement income they want.The evidence therefore suggests that many TSP participants could benefit from the professional asset allocation offered by the lifecycle funds. |
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| Q4: |
What will the TSP lifecycle funds invest in? |
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The TSP lifecycle funds will invest only in the five funds currently offered by the TSP. We will not be adding new funds or asset classes. Thus, the lifecycle funds will be composed of various percentages of the G, F, C, S, and I Fund assets. The C, S, and I Funds will provide exposure to domestic and international equities, while the G and F Funds will provide fixed income and stable value investments. |
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| Q5: |
How is the TSP planning to implement these lifecycle funds? |
A: |
The Federal Retirement Thrift Investment Board has hired, through competitive procurements, two firms to advise it on the development and implementation of the TSP lifecycle funds. Mercer Investment Consulting, Inc., is developing the asset allocation models for the funds, while CitiStreet LLC will help devise communications materials for the funds. |
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| Q6: |
How many lifecycle funds will be offered? |
A: |
Based on Mercer's recommendations, the TSP decided to offer five lifecycle funds, collectively referred to as the “L Funds”:
- L 2040, with a horizon date of 2040
- L 2030, with a horizon date of 2030
- L 2020, with a horizon date of 2020
- L 2010, with a horizon date of 2010
- L Income, for participants who are already withdrawing their money or who are just about to begin withdrawal.
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| Q7: |
How do I begin investing in an L Fund? |
A: |
Beginning August 1, you can invest in an L Fund by:
-Changing your current contribution allocation to invest future contributions.
-Completing an interfund transfer to move your existing TSP account balance.
(Note: For each calendar month, your first two interfund transfers can redistribute money in your account among any or all of the TSP funds. After that, for the remainder of the month, your IFTs can only move money into the Government Securities Investment (G) Fund.) |
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| Q8: |
Will I have to pay extra fees or expenses to invest in the L Funds? |
A: |
No. The only fees or expenses charged for the L Funds will be the expenses associated with the individual TSP funds in which L Funds invest. |
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| Q9: |
Will there be any restrictions on my investment in the L Funds? |
A: |
No. You will be able to enter or leave the L Funds when you want, as you can with the individual TSP funds. You will also be able to move among the L Funds. Therefore, if your time horizon or your investment strategy changes significantly, you can select a different L Fund or change to the individual TSP funds. You can invest any portion of your account in the L Funds, and you can invest in more than one of the funds (as well as in the individual TSP funds). However, participants are cautioned about investing in multiple funds. The L Funds are designed so that 100% of your TSP account should be invested in the single L Fund that most closely matches your time horizon. Any other use of the L Funds may result in less than optimal returns, a higher amount of risk in your portfolio, or both. |
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| Q10: |
My time horizon date falls in between the time horizon dates of two of the L Funds. What should I do? |
A: |
You can choose the L Fund that is closest to your desired time horizon date. The following chart can help you decide:
| If your time horizon is: |
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Select: |
| 2035 or later |
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L 2040 |
| 2025 through 2034 |
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L 2030 |
| 2015 through 2024 |
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L 2020 |
| 2008 through 2014 |
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L 2010 |
| Before 2008 (or currently receiving monthly payments) |
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| Q11: |
Can I lose money in the L Funds |
A: |
Yes. Because the L Funds will invest in the five individual TSP funds in varying percentages, the L Funds can have periods of gain and loss, just as the individual funds do. Investing in the L Funds is not a guarantee against loss and does not eliminate risk. |
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| Q12: |
If I can lose money in the L Funds, why should I invest in them? |
A: |
The L Funds provide a way to diversify your account optimally, based on professionally determined asset allocations. This provides you with the opportunity to achieve a maximum amount of return over a given period of time with a minimum amount of risk. Remember, however, that both the expected return and expected risk are based on assumptions about future economic performance and the most likely investment results. There is no guaranteed rate of return for any period, either short-term or long-term. These funds make investing easy, since the investment decisions are made by investment professionals and are carried out automatically. You don't have to worry about the appropriate investment mix or remember to rebalance your account to maintain your investment strategy. |
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| Q13: |
Who should not use the L Funds? |
A: |
Participants who have unique investment needs and the discipline to develop and follow an investment strategy that is appropriate for those needs may not benefit from the L Funds. This may include, for example, participants who have developed their own asset allocation strategy with the help of a professional investment advisor, or participants who are already investing substantial assets outside of the TSP and whose TSP asset allocations need to take those other investments into account. |
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| Q14: |
Can I duplicate the L Fund allocations without investing in the L Funds? |
A: |
This is theoretically possible, but it would require a great deal of time and discipline to rebalance and reallocate your account properly. Because the L Funds do not have any additional fees or expenses and have no other investment restrictions, it would not appear to be worth the effort to try to duplicate their performance yourself. |
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Q15: |
I'm going to invest in the L 2030 Fund. Do I have to take action to move my account into the L Income Fund in the year 2030? |
A: |
No. Everything is done automatically according to the fund's target date (in your case, 2030). Over the years, the investments in the L 2030 Fund will be automatically adjusted to become more and more conservative. By its target horizon date (July 2030), the allocation of L 2030 will be the same as the allocation of the L Income Fund. At that time, the L 2030 Fund will roll into the L Income Fund and the L 2030 Fund will no longer exist. |
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| Q16: |
Why does the L Funds' efficient frontier line look so flat? |
A: |
The efficient frontier is usually described by a curved line. However, in the case of the L Funds, the curve of the line is affected by the unique risk and return characteristics of the G Fund. The G Fund is able to deliver rates of return like those on long-term Treasury securities with very little expected variance of returns (i.e., little risk). This means that expected returns on the left end of the line (where the G Fund is the most significant part of the L Fund portfolios) are higher for the amount of risk taken than would normally be the case. This results in a flatter line. |
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| Q17: |
I recently received a disc in the mail from the TSP about the new L Funds, but it did not work in my computer's CD drive. What is the matter? |
A: |
The disc you received from the TSP is a DVD, which is meant to be played in a DVD player and viewed on your television screen. It is not a CD, and therefore cannot be viewed on your computer unless you have DVD drive. |
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TSP Lifecycle Funds