The L Fund — The L Fund is a fund better known as a Life Cycle Fund. It works like this: A new FERS employee, for instance, would put his or her 15 percent in the L Fund. There is no selection by the employee into what funds the 15 percent would be invested. With a new employee OPM would probably invest the money in the most aggressive funds. Most likely the money would be placed into the three stock funds (C, S and I) with nothing or very little in G or F funds.

As the employee’s career reaches mid-term, OPM would gradually start investing the money into the G and F funds, which would put the employee’s investments at less risk. Then, when a few years closer to retirement, most of the money would be invested in G and F. The theory is that the closer to retirement the less risky the investments would become so the money left in the TSP would be better protected in case of a slump in the market such as happened in the early 2000s.

I don’t agree with this whole idea. What if instead, the market was going up or hit a high during those latter years of investing the 15 percent into bond fund and a money market fund? And the employee is looking at an annual profit of only 4 or 5 percent instead of 10 to 12 percent? This whole thing is based upon the idea that folks will want to take out their TSP upon retirement and start spending it. In the first place, after retirement, their TSP takes on the rules of an IRA. You can’t take it out until you are age 59 1/2 . If you take it out anytime after 59 1/2 and don’t roll it over into an IRA, you must pay income taxes on all of it.

If you believe (like I do) that the Lifecycle Funds are too conservative, or you are unsure as to which funds to invest in, go ahead and invest in the Lifecycle Fund but add another 10 or 15 years on to your retirement date. This will increase the stock exposure for a longer period of time.

What we try to get across to folks in our retirement workshops is that the TSP is very important, particularly with FERS employees, since they will not receive the great pension that CSRS employees will be and are getting. FERS folks are only investing 1 percent a pay period whereas CSRS employees are putting in 7.5 percent with a government match of 7.5 percent. The FERS program was put in place simply because of the expense of the CSRS program to the government. And that’s why FERS employees can (now) put in 15 percent with a government match of 5 percent while the CSRS employees can (now) only put in 10 percent with no government match.

I have been retired from the NPS now for over 25 years. When I retired there were no IRA or 401(k) (TSP) plans. We knew we had to go back to work, which we did. A 6(c) retirement sure helped also. And we knew we would have to invest our savings aggressively in order to make ends meet in our old age.

Our words of advice to employees (particularly the FERS employees) are that the TSP is their retirement plan. They must invest in the TSP aggressively while working and then carefully transfer their TSP funds into IRAs where they must reinvest all of it into equity investments with both growth and income goals. They must keep the TSP in that venue and keep it whole and working for them in order to survive the 20, 30 and hopefully more years in retirement. Just the pension (particularly FERS) isn’t going to make it. You worked hard for your money, now make it work hard for you!

~ Frank Betts
Retired

Previous Columns
Fall 2005
Summer 2005
Spring 2005
Winter 2004-05
Fall 2004
Summer 2004
Spring 2004
Winter 2003-04
Fall 2003
Summer 2003