The Thrift Savings Plan has announced that, beginning in January, the L Funds or “Lifecycle funds”, offered to plan participants will begin to change.

According the TSP’s website: “Effective in January 2019, we will increase exposure to international stocks (the I Fund) from 30% to 35% in all L Funds. The L Income Fund stock allocation (C, S, and I Funds combined) will increase from 20% to 30% over a period of up to 10 years. The total stock allocation for the L 2030, L 2040, and L 2050 Funds will hold steady for a period of years to facilitate transition to the L 2060 Fund when it is introduced in 2020. Finally, at that time, the L 2060 Fund will begin with a 99% stock allocation.”

While the exact nature of the changes, and their implementation, is not completely clear from this notice, the general idea seems to be to increase the exposure to equities in all of the L Funds over the coming 10 years. Hopefully, additional details and projections will be released soon. Until then, there’s really not much you can do to respond to the proposed changes.

Although they do offer certain benefits, I have never been a fan of the L Funds. The L Funds are professionally constructed investment allocation models designed to maximize the expected return produced for a given level of investment risk. They can help to reduce the possibility that you are improperly diversified and “wasting risk” – taking more risk than needed to obtain a return on your investment.

The problem I have with them is that they are nearly impossible to use in designing and managing a retirement plan. This is because, except for the super-conservative L Income Fund, their allocations are constantly changing. Since their allocations change daily to become more conservative, their expected return and risk statistics also change daily. These statistics are critical to determining how well an investment strategy will support a given series of withdrawals over the course of your retirement. Without them, effective investment management is impossible.

Unfortunately, the upcoming changes to the funds will only exacerbate this problem. It appears that starting in January, the constant changes will be compounding, and the funds’ future behavior will be even harder to predict. If the TSP truly wants to help its participants secure a better retirement, then I urge them to abandon the current version of the L Funds in favor of a series of fixed allocation funds with published risk and return statistics. This would provide participants with the benefit of properly diversified portfolios and the predictability needed to use them to their best advantage.

Written by Mike Miles
For the Federal Times
Publication October 14, 2018