TSP Investment Options: Learning More about the G Fund

By Carol Church

Military service members are fortunate to have the investment options of the Thrift Savings Plan, or TSP, available. This defined contribution plan offers excellent savings and tax benefits that are similar but arguably substantially superior to those provided to private sector employees via 401K plans.

From tsp.gov

However, just as with 401K plans, a problem exists where investors may not know how to invest their money. As a result, they may end up making choices (or “non-choices”) that are not optimal. With the TSP, one concern is over-investment in the so-called G Fund.

What is the G Fund?

The Government Securities Investment Fund, or G Fund, is made up of non-marketable U.S. Treasury securities that are guaranteed by the government (these securities are not available to private investors). These funds are safe (not 100%, but pretty darn close) and investors do not run the ever-present risk of losing money that they do when investing money in stocks and bonds.

Why are So Many People Invested in It?

Nearly all of the TSP’s millions of investors have some of their money in the G fund, and almost half of them have all of their money in the G fund. There’s a reason for this: until fairly recently, employees’ TSP funds automatically went to the G fund unless they manually reallocated them. In other words, the G fund was the “default” choice. So if you weren’t sure what to do with your TSP funds, or just never even thought about it at all, the money went to the G fund.

This is no longer the case, though. Starting in 2015, the “default” TSP option switched over to Lifecycle funds, which allocate investors’ money in various TSP funds based on their age. There is still the option to allocate funds at your discretion.

What are the Pros of the G Fund?

The G Fund is safe. Although there is some hypothetical risk, it seems unlikely to be realized. For investors who are close to retirement, or for those who need to balance their portfolio with some safe investments, it is a great choice.

The G fund also offers a good interest rate considering its safety. Other low-risk choices like money market funds and CDs don’t offer as good a rate of return.

What are the Cons of the G Fund?

The con of the G fund, and it is a big one, is that it offers relatively low returns and it exposes investors to inflation risk. While the funds’ value has typically outpaced inflation, this may not always be the case. In other words, there is a chance that investors who put their money in G fund will “outlive” their money. The returns just may not be sufficient. For examples of how this can happen, check out www.fedsmith.com/2016/03/08/the-true-cost-of-the-g-fund.

What Should Investors Do?

In general, switching to a Lifecycle fund is likely to be a good idea for those who aren’t interested in learning much more or in active management. However, situations are going to vary depending on how close people are to retirement and risk tolerance. You can see the annual returns for the different funds here to get a sense of how they have been doing. The important thing is for people who are still “sitting on” money that is 100% in the G fund to consider is if this is really going to to work out for them. We spend so much time urging people to fully fund TSP, but it’s important to consider what people are actually funding when the money goes to TSP. The situation needs to be fully considered.

To learn more, visit the tsp.gov or the TSP YouTube channel.