The Thrift Savings Plan’s G Fund offers participants a combination of risk and return that isn’t available
anywhere else.

Consider a few facts about the G Fund:

  • The share price remains relatively stable at around $10.
  • The return is composed exclusively of earned interest.
  • The yield is based on a weighted average of about 65 government securities with a weighted average maturity of about 15 years.
  • The annual return has averaged 6.9 percent since its inception in April 1987, according to the Federal Retirement Thrift Investment Board.
  • The G Fund’s annual returns have ranged between 4.0 percent and 8.9 percent since the fund’s

Since 1987, annual inflation has averaged about 3 percent and ranged between 1.6 percent and 5.4
percent, according to the Federal Reserve Bank of Minneapolis. So, the G Fund has delivered an average real rate return, after inflation, of 3.9 percent during its life.

When compared with the performance of stable value investment alternatives that make up the typical
employer-sponsored retirement plan, these characteristics are impressive. They are especially impressive when you take into account the fact that the G Fund’s underlying investments are backed by the government, making them essentially free from the risk of default — the lowest-risk investment securities available anywhere.

Several factors make the G Fund attractive:

  • Yields are higher than expected when compared with the most similar alternatives. For example, the G Fund’s average yield since 1988 has exceeded that for the 90-day Treasury bill by 1.8 percentage points per year.
  • The fund’s stable share price compares favorably with investment alternatives with similar expected yields. Medium- and long-term Treasury bonds, for example, typically experience value fluctuations, as reflected in bond prices, of plus or minus 10 percent or more over their lives.
  • The G Fund is free, or nearly free, from three types of risk commonly associated with fixed income
    securities: credit risk, interest rate risk and inflation risk.

Credit risk refers to the risk of default, and it is an important factor to consider when investing in fixed
income investments like notes and bonds. Since the G Fund’s underlying investments are backed by the
full faith and credit of the government, they are considered safe and free from credit risk.

In addition, the G Fund’s investments mature in a matter of days, so interest rate risk — the risk of getting
stuck with lower-than-market interest rates for any significant period of time — is avoided. The fund’s yield responds quickly to changes in market interest rates and is expected to keep pace with rising and falling rate trends.

Inflation risk; is the risk that the value of your investment will not keep pace with inflation and will be
reduced over time. The G Fund’s returns have historically exceeded the rate of inflation and can be
expected to continue to do so. While this is not guaranteed, it would take a major shift in the way this
investment is being managed to change this expectation. Consequently, as things stand today, investors
in the G Fund should not be concerned with inflation risk.

Still, the G Fund should not be considered risk-free. Avoiding another type of risk, common to all
investment types, is key to successful investing. This risk, which I call strategic risk, is defined as the
possibility that your investment vehicle, or strategy, may be incapable of supporting your financial

The G Fund is an outstanding short-term investment. It offers relatively high yields and stable value of principal at the same time. I can’t think of a better investment option for cash reserves or funds that may be needed within the coming year or so. But, over the long term — say 10, 20 or 30 years — the G Fund can be expected to earn rates of return substantially below those of other, more volatile alternatives. This may mean that your financial plan will fail to meet your expectations, or at least that you will forego the opportunity to earn significantly higher returns.

As an example, according to the Federal Retirement Thrift Investment Board, the C Fund, a common
stock index investment fund, has returned about 12 percent per year, on average, since its introduction in 1988. Accounting for inflation, that’s about a 9 percent real rate of return. The chart shows the long-term impact of these rates on your account balance.

So consider the G Fund a great alternative to cash in your portfolio. Whether as a liquid investment for
cash reserves, or as a volatility-dampening component of your asset allocation strategy, the G Fund is a
great investment. But remember: In the long term, it is no substitute for a mix of stocks and bonds
designed to maximize the probability of achieving your financial goals.

Written by Mike Miles
For the Federal Times
Publication September 6, 2004