L Fund may prove conservative in planning early retirement


With the new year, change has come to the Thrift Savings Plan’s lifestyle funds, or L funds. One fund, L 2010, has been retired. Another, L 2050, is set to become available at the end of this month.

The L funds are a set of five investment funds that are professionally designed with different asset allocations of TSP’s five underlying funds — the C, S, I, F and G funds. The allocations are automatically adjusted in relation to how soon an investor will retire.

TSP recommends that you select the L Fund with a maturity date that most closely matches your expected retirement date, with those near or in retirement choosing the L Income Fund. L Income is the most conservative, designed to be the least volatile of the L funds. It has the highest percentage of its assets invested in the bond-based F Fund and the G Fund, invested in government securities; and the lowest percentage invested in the stock-based of the C, S and I funds.

L 2040 is currently the most aggressive, or volatile, of the L funds, with a majority of its assets invested in the stock funds.

There are currently four L funds — the L Income, L 2020, L 2030 and L 2040 funds. Each of the L funds’ asset allocations changes gradually from its beginning allocation to the allocation of the next more conservative fund. This takes place over 10 years until finally the allocation of the L Income Fund is reached. Over time, L 2040 morphs into L 2030. Correspondingly, L 2030 morphs into L 2020, and L 2020 into L Income.

On Dec. 31, L 2010 reached maturity and its assets were transferred into L Income, where they will remain until participants withdraw or reinvest them in other funds. At the end of this month, a new fund will be added to the L funds lineup: L 2050, providing a new, most aggressive fund to the fold.

So, what does this mean to TSP investors? If you are following the TSP’s recommended method of selecting and using the L funds and your retirement date hasn’t changed, it may mean nothing. Your investment will continue on its path toward, or remain in, the most conservative investment allocation by the time you retire. Investors who are 35 years or more from retirement will have a new fund to fit their time horizon.

However, since the L funds were introduced, I’ve questioned their value. In my experience, the L funds tend to produce more conservative allocation schemes than most investors would choose when they see the level of retirement income these allocations produce.

Many retirees would like to continue, or even increase, their standard of living in retirement. Many career federal employees would like to retire before age 65, when they have a significant probability of living another 30 years. They’re young and, rather than rocking their retirement away on the front porch, would like to travel, dine out, play golf and do all of the things they couldn’t do while they were working and raising kids. I don’t understand why a 55-year-old retiree and an 85-year-old retiree should have the same asset allocation, as the TSP recommends.

The asset allocation decision should rest on more than just the number of years to retirement. It should consider the amount of time that might be spent in retirement and the stream of benefits that will be expected from the portfolio during that time, among other things.

How would you feel if you found out, years later, that you settled for a fraction of the income you could have enjoyed if you had used a more appropriate investment strategy? The L Funds are, unfortunately, a one-size-fits-all solution, and federal employees and annuitants deserve better. Better than nothing? Maybe. But, certainly not the right solution for every participant.


About Author

Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to fedexperts@federaltimes.com and view his blog at money.federaltimes.com.

1 Comment

  1. There is the option to spice things up by using an L Fund and adding the basic funds. For example having the L Income fund at 80 percent, and the I Fund at 20%. That would elevate the overall international componant.

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