TSP Warning: Cover Your Assets

Wednesday - 6/23/2010, 4:00am EDT

Financial plannerAllan Roth (CBSMoneyWatch.Com) doesn't work for Uncle Sam. But he'd like to join the Thrift Savings Plan because of its low fees and the safety of the special Treasury securities G-fund.

While he's figuring out a way to get into your federal 401(k) plan, we asked him to do an advice-to-you guest column. Check it out, this is a very smart fellow:

    "I've never been shy about admitting that I wish I had access to the Thrift Savings Plan. In fact, I've said, and believe, that the TSP is the model for all 401(K) plans. Yet the average TSP account holder earned far less than the TSP funds earned. Who's to blame, you ask? Did someone siphon off a portion of the money perhaps? In a word, no.

    "The answer actually lies with the Federal employees themselves who tried their hand at market timing and failed miserably. Like all people in all cultures, investors tend to gravitate toward what is hot and run from what is not.

    TSP spokesperson, Thomas Trabucco, was kind enough to give me historic data on fund contributions and transfer activity. As a certified math geek, I gleefully went looking for patterns and these were easy to find. Here are a few:

  • " When markets were booming from 2004 to 2007, contributions to the G Fund (Government Securities Investment Fund) fell from 40% of new money down to 33%. Employees transferred funds out of the unsexy G Fund to stocks just in time to get creamed in the 2008 stock market bear. In 2008, the G Fund became much more popular as new contributions skyrocketed to 43% with a flood of transfers back to the G Fund. Much of this money missed out on the great stock market recovery of 2009.

  • "While stock markets were hot from 2004 - 2007, international stocks where the hottest, nearly doubling the return of U.S. stocks. Accordingly, the amounts, being contributed to the I fund (International) increased from 6% of new money in 2004 to 13% in 2007. Transfers into this I Fund ranged from $1.5 to $3.7 billion annually during those years. I fund balances reached a peak just in time for the 2008 stock market bear that hit international stocks even harder than the U.S. stock market. Then, in 2008, employees fled international just in time to miss out as international stocks outperformed U.S. stocks in 2009.

    "I could walk you through the same scenarios for other funds, but I think you get the drift. Pretty much like investors everywhere, Federal employees are programmed to buy high and sell low. You put money into what has performed well and take it out after poor performance. Congratulations - that makes you human. And being human makes you feel like you can take more risk in up markets only to see you've overestimated your level of risk in down markets.

    My advice

    "I once thought it was impossible to time the market, but the field of behavioral finance has taught me otherwise. Investors actually do possess a knack for timing the market, unfortunately it's poorly. The TSP does what it can to control market timing by limiting transfers into stock funds to twice monthly. The rest is up to us.

    "A good start is to pick an asset allocation target and stick to it. Rebalancing back to those targets means you must be doing the opposite of the herd. You must buy the C, S, and I funds in down stock markets, and the G and F funds in bull stock markets. That's how you buy low and sell high in what my son would say is a "duh" moment.

    "If you don't have the discipline to do this, the TSP gives you yet another option. Buy the L (Lifecycle) funds. They will do the rebalancing for you.

    Dare to be dull

    "Mike Causey and I were first introduced because we both used this same slogan. I happen to think the TSP is the dullest 401(k) plan around which is why I so badly wish I could be a participant. The TSP's executive director, Greg Long, confirmed the dull objective when he stated a goal of the plan was never to end up in the news. If it did, he said he hoped it was in the newspaper on page D38.

    "I'm thrilled Mike asked me to write this guest column. It gives me the opportunity to express my appreciation to all of you Federal employees for all you do to keep our country running. I urge you to have an exciting life, but suggest you don't try to get that excitement from the TSP.