US government employees are automatically enrolled in the Thrift Savings Plan as part of their retirement package under the Federal Employees Retirement System. Federal workers automatically receive an amount equal to 1.0% of their salaries deposited monthly into their Thrift Savings Plan accounts. They can invest additional salary dollars with limited matching by the federal government. Federal employees under the Civil Service Retirement System may participate in the Thrift Savings Plan, but they do not receive the automatic 1.0% contributions or matching contributions.
Contributions to the Thrift Savings Plan are important, but they can only get you so far. The key to growing this money is investing it.
Two Approaches to Investing
Thrift Savings Plan participants have two options for investing. The first option is to invest in the Lifecycle Funds or L Funds. These funds work like retirement date funds offered by investment companies. The second option is to invest in individual funds that are used to make up the L Funds. Participants can use either or both approaches.
L Funds are named by the approximate year that investors believe they will begin withdrawing money from their Thrift Savings Plan accounts. This year is not necessarily the year that an employee will retire; however, the retirement year and year when an employee starts withdrawing funds are often the same. Individual circumstances may compel a plan participant to leave money in for longer.
Participants choose to invest in L Funds for simplicity. Federal employees may not have the time, knowledge or willingness to manage their Thrift Savings Plan money through individual investments. L Funds allow the employee to make one decision -- when they expect to begin withdrawing money -- and let the funds do the rest.
Following basic investing principles, a younger investor should be willing to assume more risk than an older investor. The younger investor has more time to ride out the ups and downs of investing. The mix of investments within L Funds changes over time to become more conservative as the fund year approaches. A more conservative approach means less risk but lower earning potential.
There are currently five L Funds available to Thrift Plan Participants:
- L 2050
- L 2040
- L 2030
- L 2020
- L Income
The L Income Fund is for plan participants who are already withdrawing money or intend to between now and 2021. Federal employees who intend to begin withdrawing money around the midpoint of a decade should decide whether they’re more likely to withdraw sooner or later than their chosen year and invest accordingly. As time goes on, more L Funds will be created to replace ones that become outdated.
If plan participants want to manage their accounts closely, they will skip the L Funds and put their money in individual funds. While the L Funds become less risky over time, participants investing in individual funds must manage how much risk they are willing to tolerate over time. The individual funds make up the mix of investments within L Funds.
There are five individual funds for Thrift Savings Plan participants:
Government Securities Investment (G) Fund
This fund invests solely in short-term US Treasury securities. Earnings are similar to those of long-term Treasury securities. There is no risk of losing principal.
Common Stock Index Investment (C) Fund
This fund mimics the Standard & Poor’s 500 (S&P 500). Stocks come from mid-sized US companies.
Fixed Income Index Investment (F) Fund
This fund mimics the Barclays Capital US Aggregate Bond Index. The bonds in this fund are from various areas of the bond market.
Small Capitalization Stock Index (S) Fund
This fund mimics the Dow Jones US Completion Total Stock Market (TSM) Index. It is more volatile than other individual funds but offers higher earning potential.
International Stock Index Investment (I) Fund
This fund mimics the Morgan Stanley Capital International EAFE Stock Index. It allows you to invest in large companies in developed countries.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.