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What is the best way to invest my Thrift Savings Plan?

Updated: Feb 20, 2023

As a civilian federal employee, it's important to have a strong understanding of your retirement savings options, particularly the Thrift Savings Plan (TSP) and Federal Employees Retirement System (FERS). If you are unfamiliar with TSP investments, this blog post is for you. Here, we'll delve into the details of these important retirement savings plans and help you understand how they can help you achieve your financial goals.

Thrift Savings Plan (TSP)

The Thrift Savings Plan is a retirement savings and investment plan for federal employees and members of the uniformed services. It operates similarly to a 401(k) plan and provides a range of investment options for participants to choose from. The TSP is designed to help you save for your retirement by allowing you to contribute a portion of your pre-tax salary into an investment account. Your contributions are invested in one or more of the five different funds offered by the TSP, and the investment returns generated by these funds are used to grow your retirement savings.

As a recap, the five different funds offered by the TSP are the G Fund, the F Fund, the C Fund, the S Fund, and the I Fund. Each of these funds invests in different types of securities and offers different levels of risk and potential return. Let's take a closer look at each of these funds:

G Fund: The G Fund invests in government securities and is considered the safest of the TSP funds. This fund provides a stable return and is ideal for those who are risk-averse. The G Fund is considered a good option for participants who are nearing retirement and are looking to preserve their hard-earned savings.

F Fund: The F Fund invests in fixed-income securities and is designed to provide a balance between stability and growth. This fund is ideal for those who are looking for a steady return and are not comfortable with the volatility of the stock market. The F Fund is a good option for participants who are looking for a mix of stability and growth in their retirement savings.

C Fund: The C Fund invests in a stock index fund that tracks the S&P 500. This fund is ideal for those who are looking for long-term growth and are willing to take on more risk. The C Fund is a good option for federal employees who have several years of investing left and are looking for higher returns over the long term.

S Fund: The S Fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. This fund is ideal for those who are looking for exposure to small- and mid-sized companies. The S Fund is a good option for participants who are looking to invest in the growth potential of smaller companies.

I Fund: The I Fund invests in a stock index fund that tracks the MSCI EAFE Index, which represents developed markets outside of the United States. This fund is ideal for those who are looking for international exposure and are willing to take on more risk. The I Fund is a good option for participants who are looking for exposure to international markets and are willing to accept the risks associated with investing in foreign markets.

L Funds: The L Funds, commonly referred to as “Lifecycle Funds”, are designed as a diversified mix of the five individual funds. The target allocations automatically adjust, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates. These funds are a good option for those that want simplicity. Caution, not everyone that has the same retirement date has the same investment goals. Your fund may be too risky or too conservative based on your investment objectives.

What about the fees? For 2022, the average total expense ratio was $0.64 per $1,000 invested. For example, the total expense ratio for the L2035 Fund was 0.064%. Therefore, if you invested in the L2035 Fund in 2022, earnings were reduced by 64 cents per $1,000 of your L2035 Fund balance.

On top of those funds, TSP has a mutual fund window which seems like an exciting option. While this offers many opportunities for flexibility, it is also costly. Unlike most 401(k) plans, the mutual fund window has severe cost limitations. Your initial transfer to the mutual fund window must be $10,000 or more but may not be more than 25% of your total TSP savings. Meaning, you must have a minimum of $40,000 in your TSP account to ensure that your initial transfer isn’t more than 25% of your total TSP savings. Then comes the fees that are charged. When you initiate your first transfer, the combined $150 ($55 administrative fee plus $95 maintenance fee) will be taken, plus a charge of $28.75 per trade. When you sell one mutual fund to buy another fund the total would be $57.50 to complete one sell-and-buy trade. Do not forget to add the fund expense ratio as well to this total. I may also mention that if you have an advisor making these decisions for you, there may be a fee for that as well. One highly rated fund is Catalyst/Millburn Hedge Strategy Fund Class I (MBXIX) charges a fee of 2.02% compared to the TSP C Fund at 0.059%. To put that into perspective, if you invested $10,000 into MBXIX it would cost you $202 versus the C Fund $5.90.

Let us expand this conversation to include this highly rated fund MBXIX with an initial investment of $100,000 over a 20-year time horizon with an average annual total return of 9.76%. The investment value before the fees would be $643,994.22. Incurred cost from the fund would be $96,467 and the biggest issue is the lost opportunity cost of $119,343. Don’t forget the mutual fund window administration, maintenance fee, and trade fee costs of $3,029 for making one transaction. That is a total cost of over $218,000. You really need to consider if you can generate more returns with the mutual fund window versus sticking with the TSP options that are provided.

When choosing which TSP funds to invest in, it's important to consider your individual investment goals, risk tolerance, and time horizon. You may choose to invest in one or more of these funds, and you can change your investments as your financial goals and risk tolerance change over time. It's always a good idea to speak with a financial advisor or a TSP representative for more information and guidance on choosing the right investment options for your individual situation.

I haven’t even mentioned the Roth TSP option which can be a valuable future tax planning tool. Working with a CPA or EA about your individual tax issues yearly can have a big impact on your financial future. Instead of making contributions before paying taxes like you currently do with the Traditional TSP (and paying taxes when you withdraw the money), Roth participants will pay taxes now and make tax-free withdrawals in retirement so long as they meet withdrawal eligibility requirements. All TSP participants can contribute to the Roth TSP regardless of how much money they make. This differs from ROTH IRA contribution limits which are tied to income. A Roth TSP can avoid Required Minimum Distributions (RMDs) in the future when you roll your ROTH TSP into a ROTH IRA after separation from service.

Federal Employees Retirement System (FERS)

FERS is the retirement plan for most federal employees hired on or after January 1, 1984. It is a three-tiered system that includes a basic benefit, Social Security, and the Thrift Savings Plan (TSP). The basic benefit provides a monthly annuity based on years of service and your highest three years of basic pay. Social Security provides a monthly benefit based on your lifetime earnings, and the TSP provides a savings plan for you to invest in for your retirement. FERS, while not overly complicated, has issues you need to consider such as eligibility, computation, and creditable service. You may want to discuss other issues such as the “Type of Retirement” which may include a deferred retirement.

In summary, if you are a federal employee who is 50 years old or older, it is important that you understand your TSP and FERS options. Considerations for Health Benefits and Life Insurance coverage are other major topics to consider before you retire. Having a TSP “exit plan” on how to efficiently remove assets as you move into retirement. Taking advantage of these benefits can help ensure a secure financial future for you and your family. If you have any questions about your TSP and FERS options, it's always a good idea to speak with a financial advisor and OPM (Office of Personnel Management) representative for more information.


Todd Pouliot, AIF

P: 844-592-9888

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