What the Thrift Savings Plan gets right, and what it's missing.
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By Christine Benz | 08-17-10 | 06:00 AM | Email Article

Question: As a government worker, I'm eligible to invest in the Thrift Savings Plan for my retirement. I'd like an objective view of the quality of the options, and I'd also like to be able to enter my complete portfolio on your site but can't find matches for the TSP funds on Morningstar.com. What do you think of the plan, and can you think of any funds that would be good proxies for the TSP's holdings? What is it missing?

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

Answer: I recently wrote an article about workarounds in case you can't find information for one of your investments on Morningstar.com. And the TSP options, while they have millions of investors in the U.S. government and armed forces, fall into that category. In short, I'd call the plan a winner and well worth investing in if Uncle Sam is your employer.

Cheap, Simple, and Effective
Although some retirement plans are chock-full of overpriced investment options and layers of administrative costs, the TSP lands at the opposite end of the spectrum. Most of the options are index funds (or index-based funds), meaning they track a given market benchmark and don't need to pay an active stock-picker for his or her services. ( BlackRock  manages the index funds in the plan.) TSP participants paid just 0.028% in total costs in 2009, meaning that $0.28 of every $1,000 invested went for expenses. Although that's a touch more than what participants paid in 2007 and 2008, it's still an amazing deal.

The plan also earns points for simplicity and ease of use. The streamlined lineup, with four index funds, a government-securities offering, and five target-maturity vehicles, is about as utilitarian as they come, and provides exposure to the basic asset classes that should form the foundation of every investor's portfolio.

Here's the lowdown of the investment options in the TSP, as well as ideas for proxies you can use in Morningstar's portfolio-tracking and X-Ray tools. Note that the proxies aren't perfect because in all cases their expenses are higher than the options in the TSP.

C Fund (Common Stock Index)
The C Fund tracks the S&P 500 Index, which focuses on large-cap U.S. stocks.

C Fund Proxy:  iShares S&P 500  or  Vanguard Institutional Index 

S Fund (Small Cap Stock Index)
The S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index, which consists of U.S. companies not included in the S&P 500 (mainly small- and mid-caps).

S Fund Proxy:  Fidelity Spartan Extended Market Index 

I Fund (International Stock Index)
The I Fund tracks the MSCI EAFE Index, which tracks the performance of developed foreign markets.

I Fund Proxy:  iShares MSCI EAFE 

G Fund (Government Securities)
The G Fund invests in short-term U.S. Treasury securities that are specifically issued to the TSP.

G Fund Proxy: It's tricky to find a precise proxy for the G Fund, mainly because the securities it owns are for G Fund participants only; you won't find them in other mutual funds. However,  Vanguard Short-Term Treasury  is a reasonable stand-in.

F Fund (Fixed-Income Index)
The F Fund is a total market bond market index fund that tracks the Barcap U.S. Aggregate Bond Index, which includes U.S. government bonds, mortgage-backed bonds, and corporate bonds.

F Fund Proxy:  Vanguard Total Bond Market Index  or  iShares Barclays Aggregate Bond .

L Fund
The L Funds are target-date offerings composed of the above-mentioned funds. In general, the L Funds tend to be more conservative than other target-date offerings geared toward the same retirement date; that conservatism is especially pronounced in the funds for investors nearing retirement. Not only do the funds have more bonds than the typical target-date fund for that same age band, but they also feature heavier exposure to government bonds.

L Fund Proxies: Because target-date funds vary so broadly in terms of their asset allocations and underlying holdings, L Fund holders would do well to find the allocations of their particular L fund, then use the proxies above to simulate an L fund's weightings in each holding.

What It's Missing
As good as the TSP is, it doesn't provide exposure to every nook and cranny of the market. Thus, investors looking to add to their holdings outside the TSP (such as in an IRA or Roth IRA) should explore a few key areas.

For example, the two bond funds in the plan, while solid, don't provide exposure to Treasury Inflation-Protected Securities; nor do they own lower-quality (junk) bonds or international or emerging-markets bond funds. Thus, TSP investors might devote a small share of their fixed-income portfolios to these asset classes. Morningstar's  Fund Analyst Picks are a good place to start. (The inflation-protected bond and multisector bond categories would be good ones to explore.)

And though the I Fund provides broad-based foreign-stock exposure, the MSCI index it tracks doesn't encompass fast-growing emerging markets such as those in Asia, Latin America, and Eastern Europe. Thus, risk-tolerant investors might want to venture into an emerging-markets stock or small-cap international stock fund for a small share of their portfolios.

Finally, as noted above, the L funds within the TSP lineup are generally pretty conservative, so risk-tolerant, longer-term investors in the L funds might consider tipping more of their portfolios into equities than is the case for the prepackaged target-date versions.

See More Articles by Christine Benz


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