Muscular Investing

Thrift Savings Plan (TSP) Traps 5 Million Federal Workers

Brian Livingston

Brian Livingston


The largest tax-deferred, employer-matched contribution program in the US is the Federal Thrift Savings Plan. Unfortunately, its participants suffer from having few funds to choose from. The good news is that this can be fixed. Gradually changing the portfolio just once a month easily improves your gain while keeping your losses minimal — even during severe market crashes.

 

My goal is to help the more than 100 million households in the English-speaking world that hold 401(k), IRA, and similar savings accounts. Using 21st-century financial breakthroughs, you can enjoy market-like returns and more — without your portfolio ever crashing. See my Muscular Portfolios summary.


More than 5 million account holders struggle with America’s largest tax-deferred employer-matching scheme: the Federal Thrift Savings Plan. By comparison, the Vanguard Group manages only about 2 million participants in its 401(k) management programs for private employers.

The potential participants in TSP include all employees of the federal government, including members of the military. Even if you’re not employed by a federal agency, read on — I’ll give you plenty of ideas on how to improve whatever your savings plan may be.

Restrictions in the Thrift Savings Plan

While TSP has many good features, as we’ll see in a minute, it subjects its participants to many limitations:

The worst problem is that the program offers participants only five mutual funds:

  • The C Fund holds US large-cap stocks in an index similar to the S&P 500.
  • The S Fund holds the rest of the US equity market, mainly small-cap and mid-cap stocks.
  • The I Fund offers non-US large-cap stocks, primarily in developed countries.
  • The F Fund is a fixed-income offering that tracks the US Aggregate Bond Index.
  • The G Fund is cash-like but with a higher yield: that of 4–30 year government bonds.

TSP also offers four target-date or “lifecycle” funds called the L funds. These funds simply hold varying proportions of the five main funds. L accounts allocate a greater percentage to bonds every year as participants age. For example, the L2030 Fund is targeted at workers who plan to retire in 2030, plus or minus 5 years; the L2040 Fund does the same for 2040; and so forth. There’s also an L income fund for people in or near retirement. For more information, see the TSP Wikipedia page.

The second major problem is that participants are allowed to change their positions no more than once or twice a month. The limit was one change per day until May 2008, when the current two-change rule was imposed.

The trading limitation forces TSP participants to be long-term traders, whether they like it or not. Fortunately, one change per month is plenty to wring gains out of the TSP’s meager selection of asset classes. Market-like returns with tiny losses along the way, even during severe market crashes, are easily obtained, as we shall see.

Taking advantage of the best of the plan

The US government is such a large employer that it offers some generous benefits to its employees:

  • The five main funds, some of which are managed by Vanguard, charge exceptionally low fees that average only 0.03%.
  • The government contributes 1% of your salary, whether you put in anything or not.
  • If a civilian does contribute, up to 3% of salary is matched 100%. Additional contributions — up to 5% — are matched 50%. (Members of the military are entitled to various matching policies.)

Despite the limited investment options and the monthly trading restrictions, one simple change improves TSP’s gain and keeps participants’ losses much smaller than using a TSP buy-and-hold strategy. One example of this trick is provided by My Plan IQ, which rates 401(k) plans.

Better gains with small, if any, losses during bear markets

My Plan IQ’s primary purpose is to rate large corporations’ savings programs and suggest ways to improve them. Remarkably, My Plan IQ not only describes and ranks each 401(k) portfolio — it also provides directions on which funds to hold and which to avoid as market conditions change.

Much of My Plan IQ’s information is free on its website, although some data is delayed a number of days. But the data is available immediately for people who subscribe to one of several plans, currently starting at $19.95 per month. (Disclosure: I've found it worthwhile to pay this fee since June 2013 for research purposes, although I’m not a government employee and therefore not eligible for TSP.)

The website publishes detailed performance histories of thousands of private 401(k) plans, in addition to the TSP, going back 17 years in many cases. Even better, My Plan IQ explains and tracks what it calls “tactical asset allocation” (TAA) versions of each plan. These alternative versions make gradual changes in a portfolio no more than once a month based on momentum, something like a Muscular Portfolio. The results aren’t as good as we can achieve with a full set of global ETFs, since TSP is limited to just five asset classes. Despite that, My Plan IQ’s TAA version of TSP from 2001 through 2017 was able to:

  • Boost TSP’s return over a buy-and-hold strategy almost half a percentage point annualized, which adds up over a working career.
  • Keep TSP holders’ losses at all times below 12% — quite easy to tolerate — even when a TSP buy-and-hold strategy was down 29% and the S&P 500 was down more than 50% during the 2008–2009 financial crisis.
  • In some cases, make the improved version of TSP go up when the market went down.

Best of all, My Plan IQ’s numbers are not backtests. The track records were compiled by the site in real time, giving them a great deal of credibility. Anyone can go back and find profitable patterns, but to do so without hindsight is impressive.

In the forthcoming parts of this column, we’ll see exactly what the formula is to produce higher gains with less risk, and how you can use StockCharts.com to calculate the formula for you every month.

Parts 2, 3, and 4 of this column appear on Nov. 22, 27, and 29, 2018.


With great knowledge comes great responsibility.

—Brian Livingston

CEO, Muscular Portfolios

Send story ideas to MaxGaines “at” BrianLivingston.com

 

Brian Livingston
About the author: is a successful dot-com entrepreneur, an award-winning business and financial journalist, and the author of Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk. He has more than two decades of experience and is now turning his attention directly on the investment industry. Based in Seattle, Livingston is now the CEO of MuscularPortfolios.com, the first website to reveal Wall Street's secret buy-and-sell signals, absolutely free. He first learned computer programming on an IBM 360 in 1968 at age 15. Learn More