- The Washington Times - Monday, September 28, 2009

As more investors return to the stock and bond markets, less than half of the money in the federal Thrift Savings Plan remains in supersafe, slow-growth Treasury securities.

Investors, many recovering from the shock of the stock market nose dive, had 51 percent of their money in the G-fund in June. By the end of August, the G-fund share of the total TSP pie was down to 48 percent.

The G-fund is the first and final line of retreat for TSP investors when the stock or bond markets head south. During last year’s market collapse, tens of thousands of investors pulled money out of the TSP’s stock funds and parked it in the G-fund.

Since early March, the TSP’s three stock funds have staged a big comeback, and people who left them are coming back, too. The C-fund, which mirrors the S&P; 500 index, returned 15.15 percent through the end of August.

Another index fund, which tracks U.S. medium- and small-cap companies (some of which are huge) is up 21.71 percent through August, while the I-fund, which tracks overseas stock markets, has risen 22.69 percent. The bond-indexed F-fund gained 4.64 percent.

The safe-haven G-fund increased only 1.923 percent during the same period.

But looking at the returns over a longer time frame (as in the 12-month period ending in August) presents quite a different picture. All of the TSP’s stock funds (C, S and I) were slammed last year. The C-fund lost 36.99 percent, the S-fund was down 38.82 percent and the I-fund was 42.43 percent in negative territory.

During the months of September, October and November, thousands of investors fled the sinking stock index funds for the G-fund. The stock funds rallied for the month of December but then went on a losing streak through February. But all of the index funds have rallied since March, leaving the G-fund in the dust.

Many people who got out of stocks when they were down are now returning to them because they are up.

Financial planners say long-term investors, which includes most people in the TSP, need to find some way to avoid panic when markets drop and greed when they go up.

That’s a recipe for buying high, when the markets are up, and then selling low, when the market is down.

Investors who don’t want the headache or grief of tracking the market daily should consider the L funds. The so-called Lifecycle funds let you set a target date close to the time when you will start drawing down your account. That date determines the mix of stocks, bonds and Treasury securities in your account, which is rebalanced daily and becomes more conservative as you approach your target date. These five L-funds, which are actually funds of funds, range from the most aggressive 2040 fund down to the most conservative present-income fund.

Right now the TSP has 4.1 million participants. Most of them are active investors but some are retired feds, their survivors or people who once worked for the government but moved into the private sector. The TSP is the vehicle of choice for many because its administrative fees are the lowest in the mutual fund business.

By the end of August, 615,000 feds had some or all of their money in the L-funds. When the stock market tanked last year the L-funds automatically began buying (not selling) shares in the C, S and I funds. When the market bounced back, they began selling shares to maintain the ratio of stocks, bonds and Treasury securities appropriate for their target dates.

The chief complaint against the L-funds is that they are too conservative compared to similar target funds in the private sector.

There is a way around that, some pros suggest. Instead of investing in the 2020 fund, consider investing in the 2030 fund, which will have a larger allocation of stocks.

Bye-bye health plan

Sen. Charles E. Grassley, Iowa Republican, has gotten lots of attention through his plan to eliminate the Federal Employees Health Benefits Program. The FEHBP covers 9 million current and retired feds, their dependents and survivors. It also probably covers Mr. Grassley and most of the people in his office.

The senator proposed the cut as one of 500 pending amendments to health care reform bills under consideration by a Senate-House conference committee.

Mr. Grassley’s point is a good one. He wants the world to know, and politicians to recognize, that the best health care plan in the nation is limited to people who work (or worked) for the government. But it is not a serious option.

The odds of Congress eliminating the federal program are slim and none. There would be too much opposition within the Congress itself.

If Congress really wants to get serious, it should consider keeping the FEHBP for career rank-and-file feds while eliminating it for elected politicians. That would move members of the House and Senate and their staffs into the state-based health exchanges now under consideration on the Hill.

That kind of self-sacrifice would signal that Congress is willing to lead the way into a new health care system that might later be offered to civil servants.

Don’t hold your breath.

Mike Causeys Federal Report runs Mondays. Contact him at mcausey@federalnewsradio.com or 202/895-5132.

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