CAUSEY: Investors flocking to haven of U.S. Treasury securities

By Mike Causey | Tuesday, September 23, 2008

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Despite the standard stay-the-course advice many financial planners give long-term investors, thousands of federal investors are moving money out of stock-indexed funds into what they see is the safer fund invested exclusively in special U.S. Treasury securities.

During the boom years of the 1990s the C-fund, which tracks the S&P 500 index (the largest publicly traded companies) was a favorite of federal, postal and military investors in the Thrift Savings Plan. It is the government's version of a 401(k) plan. More than 3 million current, former and retired feds have money in the TSP. At that time, it seemed the C-fund was a no-brainer. It was regularly producing double-digit returns - some years in the high 20 percent range. By contrast the G-fund (Treasury securities), which never has a bad day, rarely returned more than 3 to 4 percent. Result: The C-fund swelled in value because of earnings and employee contributions.

But in recent years, and especially lately, the stock-indexed funds like the C-fund, the S-fund (which covers most of the U.S. market) and the international stock index I-fund, have posted a string of losses.

Because the stock-index funds have been up and down, but mostly down, many federal investors have moved money from them into the safer G-fund. Most of the interfund transfer (from one fund to another within the TSP) has been from the C and I funds, with most of it going into the G-fund.

Thanks to incoming transfers of money and small growth, the G-fund was worth $631 million as of Aug. 31. The C-fund was valued at $411 million (down from $484 million in July). The I-fund totals were $186 million in August compared to $223 million the previous month.

In August, TSP investors moved $49 million from the C-fund and a $423 million from the I-fund with most of it going into the G-fund. In July, they shifted $826 million out of the C-fund and $413 million out of the I-fund.

Officials who run the TSP have tried to convince participants, who include members of Congress, that the TSP was designed to protect investors from any drop in one sector (like real estate or financials) with offsetting gains in other sectors, like manufacturing or energy.

Earlier, in the salad days of the TSP, many investors and special interest groups pressed the 401(k) plan to offer more options in sector funds, such as gold, the dot-com industry or real estate (REITs) which were hot for years. Had Congress forced the TSP to offer more sector funds, and had people invested in them they would have made a lot of money - until the respective bubbles burst. But now those potential investments don't seem as prudent or wise.

While the nation's media was focusing on the meltdown of Fannie Mae and Freddie Mac, TSP investors were protected because shares in those organizations represented less than 1 percent each of the C and F funds. Losses investors took were offset by gains in other sector funds in the diverse portfolio of the TSP.

Experts differ on what federal investors should do. Some, probably most, caution against shifting too much money (if any) into the G-fund now because they may be selling low. One said it is like the current housing market. It is a buyer's market, if you are looking for a home. But if you must sell your home - at depressed prices - to buy a house with an attractive price tag that presents a problem.

Some pros believe that for long-term investors the current situation is the equivalent of a buyers market. "The C, S and I funds may very well be 'on sale'" according to one analyst. "Over the long haul stocks have done well ... if you don't have all of your eggs in one basket."

The big problem is for people who are facing retirement and who are stunned that their optional retirement nest egg (the TSP) has shrunk. For them any major shift - say from the C and I funds into the G-fund - should have taken place a year or two ago. Not necessarily now.

Another point that is especially true for federal and postal workers. Most longtime feds, when they retire, will have inflation-indexed pensions that are higher than their private sector counterparts. Many of them don't have any company pension benefit, and of those that do few if any have any protection from inflation.

For feds, this means that many will be able to live comfortably for years on their monthly civil service retirement benefit. And they can expect it to go up each January. Currently civil service retirees (along with military retirees and people who get Social Security) are due a cost of living adjustment of 6.0 percent.

COLAs for retirees are based on inflation as measured by the Consumer Price Index. Last month, it appeared that the retirees would get a 6.2 percent adjustment based on the CPI for the month of July. But living costs dropped slightly in August. That changed the track of the COLA which is now 6.0 percent.

If the CPI goes up this month retirees will get a bigger COLA in January. If overall prices go down (as they did in August), the COLA will be less.

The good news for the tens of millions of retirees and people who get Social Security (about one in every six Americans) is that the COLA elevator only goes one way: up.

Benefits increase if there is an increase in living costs. But the basic annuity or Social Security check of a retiree does not go down if living costs drop.

• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@federalnewsradio.com.

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