To Top

What is the Best TSP Allocation?

What is the Best TSP Allocation - Understanding the Differences Among Core Funds and L Funds - Dugan Brown

Understanding the Differences Among Core Funds and L Funds

What is the best TSP allocation for a federal employee? The answer varies, and is unique depending on the circumstances, including factors like risk tolerance, time horizon, legacy goals, income needs, and more. Before deciding on your own best allocation, it’s important to have a solid understanding of each fund type. At Dugan Brown, we ensure federal employees have a foundational knowledge of the core funds (Individual Funds) as well as the L Funds (Lifecycle Target Date Funds) and understand the key differences between them. Once we establish this baseline understanding, we can then help tailor a TSP allocation that best aligns with one’s own goals and needs.

Individual Core Funds

G Fund 

The G Fund offers a safe, government-backed option focused on preserving capital, ideal for those approaching retirement who prioritize stability. While it protects against loss, there is a potential inflationary risk—the chance that your investment might not grow enough to keep up with reduced purchasing power due to inflation. Though this risk is extremely low, it remains a possibility. This fund is best for those who prioritize fund security over higher returns.

F Fund

The F Fund tracks the Bloomberg U.S. Aggregate Bond Index, offering bond market exposure with higher potential returns than the G Fund but also more volatility. This fund is composed of a diversified mix of U.S. Treasuries, government agency bonds, corporate bonds, and mortgage-backed securities. These investment-grade securities are chosen for their relative safety compared to stocks, though they carry more risk than the G Fund due to fluctuations in the bond market. The F Fund can benefit from falling interest rates, which increase bond prices, but returns may not always keep pace with inflation. Additionally, returns could be impacted if bonds are paid back early, requiring reinvestment at potentially lower interest rates.

C Fund

The C Fund’s objective is to match the performance of the S&P 500, providing exposure to large and mid-sized U.S. companies. It has historically been the top-performing TSP fund, though it experiences market ups and downs along with the broader stock market. This fund is generally best suited for investors with higher risk tolerance or who are farther from retirement, aiming for long-term growth over immediate stability.

S Fund

The S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, investing in small to medium-sized U.S. companies not included in the S&P 500. It offers the potential for growth while diversifying your domestic equity holdings. If someone invests in both the C and S Funds, they own essentially the entire U.S. stock market, covering all segments.

I Fund

The I Fund’s objective is to match the performance of the MSCI ACWI IMI ex USA ex China ex Hong Kong Index, allowing TSP investors to gain exposure to non-U.S. companies in over 40 developed and emerging markets. While it shares many risks with the C and S Funds, its focus on international equities also exposes it to currency risk from fluctuations in the U.S. dollar’s value relative to other currencies. Including the I Fund alongside other TSP stock funds, like the C and S Funds, offers broader market coverage and increases diversification.

Lifecycle Funds

Each of the eleven L Funds is a diversified mix of the G, F, C, S, and I Funds, designed to provide the best expected return for the level of risk appropriate for an investor’s target retirement date. Every quarter, the allocations of all L Funds (except L Income) are automatically adjusted to gradually reduce risk as the target date approaches. This adjustment helps ensure the fund’s risk level aligns with the investor’s stated time horizon. To keep the L Funds on track, they are rebalanced daily to maintain their target allocations. This means that at the end of each trading day, the fund buys and sells individual assets to ensure the proportions stay aligned with the target, effectively buying low and selling high.

Common Misconceptions with TSP Lifecycle Funds

There are several common misconceptions about the TSP L Funds. One misconception is that the L Funds are composed of different investments than the G, F, C, S, and I Funds, leading some to mistakenly own both the core funds and one or more L Funds simultaneously. However, the L Funds are simply diversified mixes of these core funds. The image to the right is the breakdown of the L 2040 Fund. Notice that each of the five core funds are included. 

Another misconception is that the L Fund closest to someone’s target retirement date must be the one they use for their investment strategy. While the target dates serve as helpful guides, an investor can select an L Fund based on personal risk tolerance, potentially choosing a more aggressive or conservative approach.

Diversifying Through Multiple Lifecycle Funds

It’s important to avoid owning more than one L Fund, as this can make it difficult to determine the true fund allocation. Similarly, having money in an L Fund alongside money some of the individual funds can create confusion about where the money is actually invested. While there’s nothing inherently wrong with the investments themselves, this strategy can make it harder to understand your overall portfolio allocation.

Mutual Fund Window

The TSP’s mutual fund window provides access to thousands of options, but 1) it comes with higher fees than other TSP funds, and 2) the funds aren’t vetted by a plan fiduciary. It is highly recommended to consult a licensed professional before using this option to ensure it aligns with your financial goals and risk tolerance.

What TSP Allocation is Best for Me?

Choosing the best investment strategy depends on individual preferences and retirement goals. For those who prefer having investments automatically become more conservative as their retirement date approaches, selecting a lifecycle fund might be more appropriate. On the other hand, if having more control over the allocation of equity and fixed income investments is preferred—such as prioritizing one TSP fund over another—avoiding the L Funds and creating a customized core fund allocation would be a better fit.

Ultimately, there is no perfect TSP allocation—it depends on factors such as risk tolerance, personal goals, key milestones, and other important factors. Instead of seeking the “best” allocation, it’s more important to focus on the allocation that best fits your unique situation and future goals. Nobody can predict which fund will perform best tomorrow, so it’s about choosing the strategy that aligns with your needs and adapts to your evolving financial journey.

Investment Advisory Services offered through Dugan Brown, a Registered Investment Advisor. This publication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.