The TSP is a retirement savings program for civilians and members of the armed forces who are employed by the United States Federal Government. The TSP is very similar to a 401(k) plan in many ways. They are similar because they are both employee sponsored and they are both defined contribution plans and tax deferred retirement plans. They also share the same annual contribution limits.
- Defined Contribution Plan: The TSP is a defined contribution plan, which means each TSP participant has their own individual account. The amount in their account is what has been invested by that individual, along with any matching contributions made by their employer. Increases or decreases in the value of the holdings, along with expenses and fees also determine the value of the account. Many civilians employed by the government are eligible to receive matching funds up to 5% of their total pay. Most military members are not eligible to receive matching funds of any kind.
- Tax Deferred Retirement Plan: Tax deferred retirement plans invest money from your paycheck before any taxes have been taken out. This money is then allowed to grow in an investment plan without the drag of taxes affecting the value of the funds. Taxes are assessed on the funds when they are withdrawn as qualified distributions during retirement.
- Contribution Limits: The Thrift Savings Plan follows the same contribution guidelines as the 401(k). The contribution limit in 2007 is $15,500, and those who are age 50 or above can make “catch-up” contributions, up to an additional $5,000 per year.
After signing up for the Thrift Savings Plan, investments are automatically withdrawn from the employee’s monthly pay check and invested in the fund of their choice. The default fund if the G Fund. More explanations about the individual funds are below.
Thrift Savings Plan Investment Options: The Thrift Savings Plan has 5 main fund options one can invest in. They are all based on index funds. There is also a 6th fund, the “L Fund,” or Lifecycle Fund, which is a fund comprised of the 5 main funds and allocated for a target retirement date.
Here is a listing of the funds available through the TSP (definitions taken from the fund prospectus, for more information, go to the TSP home page and click on Fund Sheets.):
- G Fund: The G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government. Thus, there is no credit risk. The G Fund offers the opportunity to earn rates of interest similar to those of long-term Government securities but without any risk of loss of principal and very little volatility of earnings.
- F Fund: The objective of the F Fund is to match the performance of the Lehman Brothers U.S. Aggregate (LBA) Index, a broad index representing the U.S. bond market. The F Fund offers the opportunity to earn rates of return that exceed those of money market funds over the long term (particularly during periods of declining interest rates), with relatively low risk.
- C Fund: The objective of the C Fund is to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies. The C Fund offers the opportunity to earn a potentially high investment return over the long term from a broadly diversified portfolio of stocks of large and medium-sized U.S. companies.
- S Fund: The objective of the S Fund is to match the performance of the Dow Jones Wilshire 4500 Completion (DJW 4500) Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index. The S Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of small and medium-sized U.S. companies.
- I Fund: The objective of the I Fund is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. The I Fund offers the opportunity to earn a potentially high investment return over the long term by investing in the stocks of companies in developed countries outside the United States.
- L Fund: The Lifecycle Funds diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons. The L Funds are rebalanced to their target allocations each business day. The investment mix of each fund adjusts quarterly to more conservative investments as the fund’s time horizon shortens. There are 5 different Lifecycle Funds targeting retirement dates through 2040.
While there are not many options to choose from, these options cover most types of major indexes and have very low fees. In 2006, the administrative expenses for all of these funds was .03% per year ($0.30 per $1,000). That is very low!