Introduced in 2005, the L Funds are the Thrift Savings Plan’s newest, and probably least understood, investment options.
The five funds tailor their investment allocations to the time horizons of their investors. The closer an investor is to making withdrawals from his TSP account, the more conservative his L Fund investment allocation becomes.
Each of the funds – L 2040, L 2030, L 2020, L 2010 and L Income – is invested in all five of the TSP’s basic funds: the C, S, I, G and F funds. L 2040 is the most aggressive, with the largest allocation to equities and the highest expected rate of return and risk. L Income fund is the most conservative, with the largest allocation to fixed income investments and the lowest risk and rate of return. The others fall in between, becoming more conservative as we move from the L 2030 to the L 2010 fund.
Unlike the other TSP funds, each of the L Funds is rebalanced to a target allocation on a quarterly basis, becoming more conservative, until it matches the allocation of the L Income Fund, which is fixed. In August 2010, the L 2010 Fund’s mix of underlying funds will stop changing when it finally matches that of the L Income Fund. At that time, the L 2020 fund’s allocation will match the beginning allocation for the L 2010 fund and will continue to evolve. The same is true of each of the more aggressive L Funds. An L 2050 fund will eventually be added to accommodate investors who don’t expect to begin TSP withdrawals until about 2050.
It’s clear to me that some investors are confused about what to expect from the L Funds. Some, in spite of being fully informed about the performance of the TSP’s five basic funds, have questioned the performance of the L Funds during periods of extreme market behavior, as though the L Funds follow a path independent of the markets and the other TSP funds. In general, it is easy to predict how the L Funds will perform. The performance of each L Fund will always fall somewhere between that of the bestand worst-performing basic TSP funds. In August, for example, the conservative, securities-backed G Fund yielded 0.28 percent while the I Fund, invested in international stocks, yielded 4.87 percent. The L Funds’ returns all fell within that range – from 1.07 percent in L Income to 3.41 percent in L 2040. The historical performance data, available at www.tsp.gov, offers further evidence of this trend.
One of the less obvious characteristics of the L Funds’ performance is that all of the L Funds can produce positive returns while one or more of the basic funds lose money during a particular period. Conversely, all of the L Funds can lose money while one or more of the basic funds produce a positive return for the period. In June, for example, all of the L Funds showed positive returns, while the I Fund was in negative territory. In January and February, all of the L Funds had negative returns, while the G Fund was up. This anomaly has led some observers to unfairly criticize the L Funds as being flawed or inferior to their alternatives. To question whether the L Funds are inherently better or worse than the other funds is unreasonable. They are just different.
In fact, this anomalous behavior is within the range of behavior to be expected from the L Funds. While one of the L Funds might be deemed to be a better or worse retirement planning solution for a particular participant at a certain point in time, this should not be confused with a general indictment of the quality of any of the TSP’s funds. The TSP offers the best retirement investment environment I have been able to find for my clients, and each of the TSP’s funds is superior to comparable funds available outside the TSP.
Since the L Funds are comprised of the TSP’s outstanding basic funds, they share the same advantages of cost and efficiency. So, while I find the L Fund program’s approach to selecting a fund and robotically changing asset allocations to be simplistic and arbitrary – less than optimal as a retirement planning solution for most participants – I do admit the funds have performed as they are supposed to. They reduce the risk associated with insufficiently diversified investments – a problem that continues to plague too many TSP participants.
In the end, the answer to the question “How have the L Funds performed?” is “Just the way they were supposed to, thank you.”
Written by Mike Miles
For the Federal Times
Publication September 14, 2009