The proposed legislation was approved and suggests reducing the mandated interest rate of the Thrift Savings Plan G Fund. The G Fund is made up of government securities and this legislation wants to have its interest rate more adequately match its risk profile.
The budget report stated, “Securities within the G Fund are not subject to default. The U.S. government guarantees payment of principal and interest. Yet the interest rate paid is equivalent to a long-term security. As a result, those who participate in this are rewarded with a long-term rate on what is essentially a short-term security.”
The report doesn’t lay out a plan for changing the G Funds rate of return, however, officials at TSP have run the numbers on tow possible replacements for the current formula. This fund’s current annual interest rate is 2.25 percent. Changing the formula would bring the rate down to 1.03 percent per year while basing it on a different timetable would bring the rate further down to 0.84 percent annually.
Kim Weaver, a TSP spokeswoman, said the agency opposes “any changes” to the G Funds rate of return. “Such a change to this would do significant damage to TSP participants’ annuity to save and invest for their retirement.”
According to a TSP report, the proposed changes could shorten the viability of an average participants’ retirement account by more than 10 years.
Lifecycle funds are designed to provide annuity until retirees reach age 92. The report said, “A participant had just retired and is invested 100 percent in the L Income Fund. The cut in the G Fund rate to a 3-month rate causes them to run out of TSP money at age 80 instead of 92.”
“Such a change would make this fund virtually worthless for TSP investors, as account growth would not keep pace with inflation nor be competitive with stable value funds. The G Fund would then only be serving the purpose of a money market account,” TSP officials said.
Jessica Klement, legislative director for National Active and Retired Federal Employees Association said, “What it does is it renders the G Fund useless. The interest would be near zero, and way lower than inflation. As it is now, in years of low inflation, the G Fund return is already incredibly low.”
TSP said it would need to reallocate money and develop a replacement if Congress approves changing the rate of return. Although, they expressed doubts about how feasible that would be.
Officials said, “Given the size of the G Fund, it may not be possible to create a new TSP stable value fund or an inflation protection fund. If the [Federal Retirement Thrift Investment Board] tried to create a TSP stable value, it’s possible that the TSP would not be able to purchase sufficient securities or would have such an impact on that price that it would adversely impact both TSP participants and other investors in the market.”
