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Stock Holdings Increased Across Lifecycle TSP Funds

stockThe Thrift Savings Plan program will increase the proportion of some investments in certain stocks with the hopes of growing the amount of money annuitants receive after they retire. Agency officials of the Federal Retirement Thrift Investment Board outlined a 15-year strategy to increase the proportion of equities in the Lifecycle (L) funds, which shift toward more stable investments as participants get closer to retirement.

Currently, TSP Lifecycle funds begin at 90% stocks, and the percentage of stocks decreases as the participant approaches their target retirement date. It drops to 50% when the participant reaches age 60, settling at 20% at age 62.

This new investment plan, known as a glide path, will be the next L fund to open—L 2060—and will begin with 99% of contributions invested in equities. When the average participant reaches age 35, the investments will begin to shift toward securities. At age 58, the fund will be 60% stocks and will move to 30% equities at age 63.

“This proposal will improve outcomes for L fund participants while not unreasonably increasing risk levels,” TSP Chief Investment Officer Sean McCaffrey said. “[The 15-year] transition plan minimizes the disruption for participants.”

Exiting accounts will maintain their current equity-to-securities ratio until they cross paths with the new glide path, at which point they will shift towards securities investment at the new rate. Further, the L funds will increase the proportion of stock holdings that come from international equities from 30% to 35%.

Russ Ivinjack, sr. partner at Aon Hewitt, who consulted with the TSP on L fund asset allocations, said that because the TSP is part of a “3-legged stool”, it can afford to take more risk.

“Having a defined benefit, we see that as a bond or a cash-like allocation,” he said. “This allows you to take more risk. Additionally, there is a great degree of income predictability, whereas if you look at industries that are highly cyclical or where the pay varies highly, you want to be more conservative.”

This new glide path will bring the TSP closer to the investment practices of other retirement programs but still remain more conservative than its private sector counterparts.