What’s wrong with the L Funds? Nothing that isn’t wrong with any other “lifestyle” fund designed to systematically shift its asset allocation according to some predetermined formula. The problem with all such funds is that, while they seem like a solution customized to individual circumstances, they’re really only a misguided attempt to help plan participants bring some order to the management of their TSP accounts.

Did I say misguided? Yes, I did. You might think that that’s a pretty strong word to describe one of the most significant efforts undertaken by the Thrift Savings Plan in the last 10 years. TSP’s management would argue that it is providing a useful investment management tool to the many participants who do not have the time, interest or experience to manage their accounts.

But, as a plan participant, you are counting on your TSP balance to support as much of what you want in retirement as possible. In helping you reach your goal, the L Fund approach leaves a lot to be desired. It is possible to recreate historical examples to show how a participant’s interests would have been compromised by the L Funds’ dogmatic march toward ever more conservative – at least with respect to portfolio volatility – asset allocation schemes. The L Funds’ weakness lies in the fact they don’t consider anything more about you or your goals than a single timeframe – the period between now and when you estimate you will need to begin withdrawals. You can rely on the L Funds to do only one thing – rebalance their asset allocation over time.

The L Funds offer the lowest common denominator in investment management. They provide asset allocation without much effort. Never mind that it might not be the best, or might be the worst, possible allocation at any given time for you. It’s kind of like preprogramming your ship’s engine to continually slow down during a transoceanic voyage with the goal of drifting slowly into port on the other side – just enough energy to make it based on a set of assumptions about currents, wind, tides, the ship’s operating condition, the passengers and cargo on board, and the most direct path. It’s not too hard to imagine that there will likely be times during the voyage when you might prefer to have the engines speed up, slow down or stop all together, in spite of the planned program. And wouldn’t there likely come a time during the voyage when you’d like to move the rudder?

Following the path prescribed by the L Funds puts the investment strategy in charge of the investor. The strategy will conspire with the factors affecting your portfolio – changes in market value, contributions, withdrawals, inflation and taxes – and you’ll be left to live with the outcomes, good or bad. To present this as a higher ground in investment management, as so many retirement plan sponsors and investment marketers have done, is irresponsible and misleading.

Your investment strategy should be designed to serve your particular circumstances and goals. It is not a one-time effort, but a process of analysis and management that adapts effectively to the inevitable change that will occur over a retirement that lasts 20 years, 30 years, or more.

This is often a complex and difficult task – a task that is, unfortunately, beyond the capability of many investors. With the massive wave of federal employees preparing to retire during the coming decades, it is time to face the fact and start being honest with investors about the need to properly plan for and manage their retirement finances. It’s time to stop pretending that anyone with a computer and an index finger can, and should feel responsible to, effectively handle the mathematics, probability analysis and management techniques required to do the job right.

If you want to make the most of your retirement resources, the L Funds are not the answer. In order to deliver optimal results, a retirement plan and investment strategy must regularly re-examine your goals, resources and assumptions about the future, and adjust accordingly. In upcoming columns, I’ll show you what it really takes to manage a retirement investment portfolio – the way the pros do it.

Written by Mike Miles
For the Federal Times
Publication February 25, 2008