Tuesday, June 17, 2008

Investors bullish, cautious on TSP

Investors in the federal government's in-house 401(k) plan continue to be enthusiastic and cautious at the same time. During the past year, more than 130,000 people signed up to invest in some or all of the Thrift Savings Plan funds. As of May, the TSP had more than 3.9 million accounts that were worth $234 billion.

Thanks to a decline in the stock market and investor caution, the once most popular option, the S&P indexed C Fund, has slipped to second place. As of April, less than 30 percent of the money invested in the TSP was in that fund, which tracks the ups and downs of the nation's 500 biggest firms.

The super-safe, never-has-a-bad day G Fund, composed of special Treasury securities, had 37 percent of the TSP funds - or about $87 billion - as of April.

About 10 percent of the TSP's investments are in the I Fund, which tracks the European and Asian markets, and only about 6 percent of the money was invested in the S Fund. Although it is called a small-cap fund, the S Fund in fact represents about 4,500 small and middle-sized firms.

The so-called Lifecycle funds are picking up in popularity, but have a long way to go to compete with the stock and bond funds. Lifecycle funds mean you pick the date nearest the time when you will begin withdrawing money from your TSP account. For most federal workers, that date is usually later, sometimes long after, they have retired.

The Lifecycle funds are more aggressive (with a larger portion of the portfolio invested in stock funds) for long-term investors, and readjust daily to become more conservative as the investor gets closer to his or her starting cash-out date. For example, the L-2040 fund has a bigger share of stocks than the year 2030 fund, the 2020 or 2010 fund or the present income fund, which is the most conservative of all.

Here is a rundown of the various funds for the 12-month period ending in May: The G Fund returned 4.36 percent, the F Fund returned 7.09 percent, the C Fund was down 6.68 percent, the S Fund was down 5.27 and the I Fund had a 2.28 percent negative return. While that is a loss for the stock funds it also presented a buying opportunity (as in the funds were on sale) for long-term investors.

The 12-month returns for the L funds indicate the impact of the stock market on each portfolio. The current L Income Fund returned 2.88 percent, and the L-2010 fund was up 1.38 percent for the period. The L-2020, 2030 and 2040, with their larger proportion of stocks, were down 0.84 percent, 1.94 percent and 2.87 percent, respectively. The long-term 2040 fund, with the biggest share of stocks, took the biggest hit.

The TSP says the crackdown on so-called "frequent traders" has worked. At one point, there were as many as 250,000 interfund transfers (moves back and forth between funds) per month. But since putting restrictions on the number of electronic transfers allowed, the interfund transfers are running between 1,500 and 2,000 per month.

Critics of frequent trading (trying to take advantage of the ups and downs of the market) say it raised administrative fees of everybody in the TSP. When Congress established the federal 401(k) plan it said special attention should be paid to those fees that are the lowest in the mutual fund business.