TSP 201: The TSP Funds

The TSP Funds

When you make contributions to your Traditional TSP and Roth TSP, the money you put in is invested in funds that allow for a wide range of market diversification. But one of the many pressing questions then becomes: How should I allocate my contributions?

There’s no blanket answer for everyone, as there are many elements that can and should determine where you decide to allocate your funds. Every person is at a different point in their career, envisions retiring at different times, or might have other factors affecting their finances. Luckily, you have the power to choose where you want your retirement dollars invested.

G Fund (Government Fund)

The G Fund offers an opportunity to loan money back to your employer: the federal government. It’s a treasury-like instrument, with the ability to earn rates of interest similar to those of long-term government securities, but without any risk of loss of principal, and very little volatility of earnings.

This fund is invested in non-marketable, short-term U.S. Treasury securities with 1–4-day maturities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government, meaning there is no “credit risk.” You cannot lose your money; there are no negative returns. They will pay back the money you’ve loaned through this fund, and at the end of each month, you can see what the returns were on your TSP statement.

Source: https://www.tsp.gov/publications/tsplf14.pdf

The interest rate resets each month and is based on the weighted average yield of all outstanding treasury notes and bonds with four or more years to maturity. Earnings consist entirely of income on the securities.

While the G Fund is low risk, it’s also likely you won’t make a lot of money from it. In 2020, the G Fund returned slightly less than 1% for the year. Over the last 10 years, it’s returned just a little over 2%. And this is because interest rates have declined over time. The G Fund is the lowest risk and lowest reward fund available.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/g-fund/

F Fund (Fixed Income Index Investment Fund)

Outside the G Fund, all other TSP funds base your return on an index. For the F Fund, that index is investment grade quality bonds measured by the Bloomberg Barclays Capital U.S. Aggregate Index. This is a broad index representing the U.S. bond market and has about 10,500 investment-grade quality bonds.

Source: https://www.tsp.gov/publications/tsplf14.pdf

Remember: A bond is a loan. It could be to the federal government, a corporation, a municipality, or other. Whatever the case, someone has agreed to pay you a certain amount of interest for that loan, and by the time they do, hopefully it has matured, and you get your principal back.

In any bond fund, you have two main concerns:
• The entity you loaned money to doesn’t pay you back. That risk is very low in the F Fund because you’re using investment-grade quality bonds. These are all high-quality entities you’re loaning to, so the risk of not getting paid back is low.
• Interest rates rise over time. Today, interest rates are very low, but they are expected to rise at some point in future, meaning rates might increase. If that occurs, it will result in negative returns in the F Fund.

In 2020, the F Fund returned 4.73%, and over the last 10 years, it returned 3.79%. That meant that by taking a little more risk with the F Fund, people were rewarded just a little bit more. Even so, the F Fund is one of the most underutilized funds in the TSP.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/f-fund/

C Fund (Common Stock Index Investment Fund)

The C Fund uses the S&P 500 as the index guideline to measure itself against, giving you the potential to earn a higher return over time. The S&P 500 is made up of largest 500 companies in the U.S., generally household names like General Motors, Procter & Gamble, and other big companies you’ve likely heard of. Your return closely tracks the share prices of those 500 companies. The S&P 500 is reported on often, so you may have a good idea of where your C Fund returns sit day-to-day. Your return also includes any dividends those 500 companies pay out.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/c-fund/

When comparing to the other funds, you may get a better return with the C Fund because you’re taking more risk. In 2020, the C Fund returned 17.16%, and 13.79% over the last 10 years. When you look at these numbers and think about your future though, keep in mind there has not been a significant market correction recently, other than during the pandemic outbreak in March of 2020. Prior to that, we have not had a true market correction or bear market since 2008, and we quickly recovered from that March downturn for a positive return in 2020. So while 13.79% is a nice return, it may not be reasonable to expect over your entire career.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/c-fund/

S Fund (Small Capitalization Stock Index Investment Fund)

When the TSP Board wanted to add access to the rest of the U.S. stock market in 2001, they added the S Fund. Now there’s an even higher potential for return, meaning also taking a higher degree of risk. The objective of the S Fund is to match the performance of the Dow Jones U.S. Completion TSM Index. This is a broad market index made up of stocks of U.S. companies not included in the S&P 500. This index includes everything below those 500 companies, approximately 4,500 companies that tend to be considered more medium- and small-sized companies.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/s-fund/

When allocating to this fund, you would have the same type of risk as you would have in the C Fund. If share prices of those companies decline, you’ll see a negative return in your S Fund. The reason it’s a little riskier than the C Fund, however, is because within this index, you have some startups and newer companies that may not be as established as the S&P 500 companies.

For a comparison on returns, the S Fund did 36.45% in 2020. That’s double what the C Fund did. However, over the last 10 years, it’s done 13.71%—almost exactly the same as the C Fund. Their longterm returns are very comparable.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/s-fund/

I Fund (International Stock Index Investment Fund)

This fund includes no U.S. domestic stock, but only those of global countries. With the I Fund, you have two additional risks you don’t have in a domestic fund. There is geo-political risk to be considered, as well as currency exchange risk. The objective of the I Fund is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. It still uses the share prices of a significant group of companies over time. Your participation in this fund should extend to paying attention to a global economy and wanting some exposure to an international market.


If you’re investing in an international fund, countries like China, India, Brazil, and Russia may first come to mind. But it’s important to note that none of those countries are included in the Morgan Stanley Capital International EAFE Index. The current index is actually very narrow, with only 22 countries and a heavy concentration in just five countries: Japan, the United Kingdom, Switzerland, Germany, and France.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/i-fund/

In 2020, the I Fund was scheduled to move from the Morgan Stanley EAFE to the Morgan Stanley AllWorld Index, which would then include a much broader range of developing countries. But that did not occur, which ultimately affected returns.

Last year, the I Fund saw a 9.99% return. Over the last 10 years, a 6.04% return. And that’s because the index itself doesn’t include fast growing international economies like China and India. Under new administration, this switch might again be readdressed. But at present, it is the highest risk fund, and with returns that currently match the G Fund—the lowest-risk fund.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-individual/i-fund/

L Funds (Lifecycle Funds)

Lifecycle Funds take the five funds already mentioned and allocate to them for you in a predetermined method based on the year you’re going to retire.

As you approach retirement, allocating funds can become more difficult because often, the closer one gets to retirement, the more conservative they may become with their money. The challenge often lies in determining when to become conservative, at what rate, and how to manage it.

The L Funds do all of that for you. Every single quarter, they become more conservative until they reach their target date, or year of maturity. Then they have the same allocation as the L Income Fund, which is the fund designed for people who are already retired and drawing income from their TSP.

They first created five L Funds, two of which have now matured: the 2010 Fund and the 2020 Fund. In July 2020, rather than having ten-year increments, which is very long period of time, they added five year increments of funds. So now there are ten Lifecycle Funds to choose from.

It’s important to note that the creator of these models, Mercer Consulting, came back to the TSP Board in 2016 and revealed a mistake in their original calculations. Their claim was that back in 2005, they could not have imagined that interest rates would stay so low for so long. And because the G Fund and the F Fund are most impacted by interest rates, they suggested putting less of the L Funds in G and F, and more in C, S, and I. So until 2028, each of those funds is getting slightly more aggressive each quarter rather than more conservative.

If you’re in one of the funds that still won’t reach maturity for more than 30 years, you’ll notice they allocate very little in the two safest funds: G and F. They allocate only about 1% to these, and everything else gets divided up between C, S, and I. If you do not want your funds allocated that way, you might instead use the L Funds as a simple guide for allocating yourself.

But if you are a “set it and forget it” person, the Lifecycle Funds may be a great choice for you. Your allocations and returns should remain very steady, meaning you are more likely to leave funds there long-term and not try to actively manage your account.

Source: https://www.tsp.gov/publications/tsplf14.pdf
Source: https://www.tsp.gov/funds-lifecycle/

In the end, where you decide to allocate your TSP funds depends heavily on how close to retirement you are, how actively you want to participate in watching certain markets, and how much risk you’re willing to take. If you’re interested in further underlying investment details related to particular fund, TSP.gov has much more information to explore. And it’s entirely possible that even more funds will be added in the future. That’s why it’s important to pay attention to your TSP contributions and where they’re being allocated.

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