TSP seeks to supplant G Fund in automatic enrollments

Monday - 12/16/2013, 3:35pm EST

Federal employees could soon be seeing a lot less of the G Fund in their Thrift Savings plan accounts.

Instead of being automatically enrolled solely in government securities, new plan participants would be shifted to an age-appropriate Lifecycle, or L, Fund as their default investing option under a proposal approved by the Federal Retirement Thrift Investment Board Monday.

The L Funds are made up of a mix of funds that fluctuates over time to balance risk as participants get closer to withdrawing funds during their retirement.

The proposal still requires action by Congress.

TSP participants in their 20s, who ostensibly have decades of federal service ahead of them, invest a "disproportionate" share of assets into the G Fund — about 48 percent, according to a memo from the board's executive director, Greg Long, presented to board members.

In fact, according to TSP statistics, TSP participants in their 20s are allocating greater percentages of their accounts toward the G Fund than participants in their 50s.

Since 2010, all newly hired federal employees are automatically enrolled in the TSP's G Fund at a contribution rate of 3 percent of their salaries. That helped solve a longstanding problem of new hires not contributing to their accounts at all. In 2012, about 97.9 percent of employees with fewer than two years of federal employees contributed to their TSP accounts — up from 81.5 percent in 2008.

But it's also led to some "inertia" on the part of new employees, according to Long's memo.

"The bottom line is that the demographics do show that participants are going into the G Fund and lingering there," even though it may not behoove them to do so, said Renee Wilder, the board's director of enterprise planning.

Since August 2005, when the L Funds were created and launched, their cumulative returns have outpaced those for the G Fund by double digits.

"Had the Lifecycle Funds been the default investment option since the start of auto-enroll, participants who remained invested during the entire period would have achieved greater investment returns and consequently, greater account balance growth than achieved by investing solely in the G Fund," Long's memo stated.

The move, however, still requires legislation. The TSP board is currently writing a draft bill and is looking for a lawmaker to sponsor the legislation, Kim Weaver, the board's director of external affairs, said. With only a few days left in the current legislative session, the earliest a bill would likely be introduced is next month, she added.

TSP participation rates trending downward

As it happens, the total allocation of assets in the G Fund is currently on the decline, board officials said. But that's necessarily a positive development. About 38 percent of all TSP assets are allocated in the G Fund — the lowest level since February 2008, Wilder said. While that might normally be a sign that participants are diversifying their investments, Wilder said the board is concerned participants are "chasing returns."

Another cause for concern is a "softness" in the overall participation rate in the TSP, which declined last month to 86.1 percent of the total Federal Employees Retirement System (FERS) population and has been trending downward since March.

Part of that decline can be blamed on the fact that the overall FERS population is shrinking, thanks to sequestration-related staffing reductions, Wilder said.

Another likely culprit is the increase in the number of of hardship withdrawals, which makes participants ineligible to contribute to their accounts for the following six months.

Data unveiled Monday show that the vast majority of participants who made a single hardship withdrawal from their accounts in 2012 — 60 percent — never returned to making contributions to their accounts when the six-month penalty period expired. About 75,000 participants made a single hardship withdrawal last year.

More than 14,000 employees withdrew money from their accounts during the 16-day government shutdown in October, alone. They'll be barred from making contributions to their accounts until May, under Internal Revenue Service regulations.

The board plans to send mailers to both participants and their agencies when the six-month lockout is nearing its end to remind them of their eligibility to restart contributions. The board is also considering rewriting TSP regulations to automatically re-enroll participants after the waiting period ends.

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