Thrift Savings Plan and three-fund portfolio...

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NYGIANT
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Thrift Savings Plan and three-fund portfolio...

Post by NYGIANT » Mon May 18, 2015 8:54 am

After years of actively "managing" my own investments, and now nearing retirement, I've decided to take the more passive approach of the three-fund portfolio. After extensive reading on this subject, and from my own personal investing experience, I have become a believer. Its simplicity and long term results are a thing of beauty, IMHO.

As a lifelong federal employee I was fortunate to have access to Uncle Sam's pre-tax Thrift Savings Plan, TSP. The investment funds available in the TSP are as follows:
G Fund - Government securities (specially issued to the TSP)
F Fund - Government, corporate, and mortgage-backed bonds (To match the performance of the Barclays Capital U.S. Aggregate Bond Index)
C Fund - Stocks of large and medium-sized U.S. companies (To match the performance of the Standard & Poor's 500 Index)
S Fund - Stocks of small to medium-sized U.S. companies, not included in the C Fund (To match the performance of the Dow Jones U.S.
Completion TSM Index)
I Fund - International stocks of more than 20 developed countries (To match the performance of the Morgan Stanley Capital International EAFE
Index)
**All funds have an administrative expense of 0.0029%. A detailed description of each fund can be found at www.tsp.gov
I am looking for some input/advice/suggestions from the Boglehead brain trust as to the best way, if there is a way, to incorporate these funds into the 3 fund portfolio?
FYI I have decided that an asset allocation of 60% equities(36% domestic/24% international) and 40% bonds(28% domestic/12% international), with an 8-10 year window, suits my particular situation best. Currently my investable assets break down as follows: 40% TSP, 10% Roth IRA, 5% Traditional IRA and the remaining 45% in taxable accounts.

Thanks in advance for your time and suggestions.

rkhusky
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Re: Thrift Savings Plan and three-fund portfolio...

Post by rkhusky » Mon May 18, 2015 9:31 am

The board would need more information on your holdings, especially the taxable holdings. Also, do you intend to leave your funds in the TSP or move some or all to an IRA?

The Bogleheads Wiki also has information on the TSP (http://www.bogleheads.org/wiki/Thrift_Savings_Plan) and it is quite popular here.

texasdiver
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Re: Thrift Savings Plan and three-fund portfolio...

Post by texasdiver » Mon May 18, 2015 9:52 am

You can't do the 3 fund portfolio with the TSP. Or at least you can't do it with 3 funds.

You will have to own both the C and S funds in (I think) a 3:1 ratio to duplicate the Vanguard Total Stock Market fund.

The I fund comes pretty close to the Vanguard total International stock fund but doesn't have the emerging markets. So you could add in maybe 5% emerging markets from another fund outside the TSP if you wanted to. Probably not that necessary.

Then you have the G fund which has no equivalent outside of the TSP program. Most investors would use it for at least a portion of their fixed income allocation if not all of it.

So to create a portfolio identical to the 3 fund portfolio using the TSP you need to use 4 funds and many investors will end up using 5 to the extent that they have a portion of their portfolio in the G fund

I use the TSP and it is great. It just wasn't designed to create 3 fund portfolios.
Last edited by texasdiver on Mon May 18, 2015 10:06 am, edited 2 times in total.

retiredjg
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Re: Thrift Savings Plan and three-fund portfolio...

Post by retiredjg » Mon May 18, 2015 10:05 am

45% taxable
21% Vanguard Total Stock Index
24% Vanguard Total International (more complete than the I fund)

40% TSP
40% F and.or G Fund

10% Roth IRA
10% Vanguard Total Stock Market

5% tIRA (edited)
5% Vanguard Total Stock Market

This is the 3 fund portfolio, substituting some G fund for Total Bond Market.

What's wrong with this idea is that it does not take into account what you have to sell in taxable to buy the funds indicated. What do you have there? Gains? Mostly long or short term or both?

What you do with your taxable account depends on a lot of things - particularly your tax bracket. If you are single, you will most likely be in the 25% bracket during early retirement. If married, you might be in the 15% bracket which could make it easier to ger rid of things you don't want in taxable.

Some more information would be helpful. Do you know your federal tax bracket?
Last edited by retiredjg on Tue May 19, 2015 6:37 am, edited 1 time in total.

NYGIANT
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Re: Thrift Savings Plan and three-fund portfolio...

Post by NYGIANT » Mon May 18, 2015 10:48 am

To address rkhusky - Within the TSP I am equally split between the G and F funds, that's more to hedge towards safety than any sort of investment strategy. I am more than willing to reallocate those funds contingent on a structured investment strategy - which is why I'm here. When I retire at the end of next year I will determine what to do with those funds, until then they must remain in the TSP.

To address texasdiver - I like what you suggested using the TSP exclusively and I would be interested to hear how long you have been using this "hybrid" 3-fund portfolio method and what results you have yielded.

As to my original posting, maybe I wasn't completely clear. I want to approximate the "3-fund portfolio" using all my investable assets of which 40% are in the TSP, 10% in a Roth IRA, 5% in a traditional IRA and the remaining 45% in taxable accounts. Consider all the assets outside the TSP as completely liquid. I am 54 years old and have an 8-10 year window before I will draw on any of these funds, if ever, and plan on drawing from my taxable accounts first. So, aside from the money in the TSP my porfolio is pretty much a clean slate right now. I would love insight on where and how to best allocate funds keeping in mind my age, time frame and future tax implications.
Thanks again...

kaudrey
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Re: Thrift Savings Plan and three-fund portfolio...

Post by kaudrey » Mon May 18, 2015 11:05 am

retiredjg told you how to do it....see her post.
Last edited by kaudrey on Mon May 18, 2015 3:40 pm, edited 1 time in total.

texasdiver
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Re: Thrift Savings Plan and three-fund portfolio...

Post by texasdiver » Mon May 18, 2015 11:09 am

FYI.

You can roll your 5% traditional IRA into the TSP if you want to. That's what I did with all of my traditional IRAs. That will simplify your portfolio a bit.

After that it's a question of how to distribute your portfolio between TSP, Roth, and taxable. You need to read the boglehead wiki on efficient tax placement to determine which asset classes are best held in taxable accounts. And then look at what is unique or best about the TSP plan (the G fund). That will guide your portfolio placement. Retiredjg has already done that for you but you should understand why.

To answer you question about my own TSP. I left federal service in 2003 and have been working in a job with a Vanguard 403(b) since then so my TSP is a shrinking portion of my overall portfolio. I rolled all my old IRAs into the TSP years ago but haven't had a way to put any more money into it since then. If I leave my current job I would probably roll all my 403(b) funds into the TSP. Right now my TSP is invested 100% in the G fund and makes up about 20% of my overall portfolio.

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grabiner
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Re: Thrift Savings Plan and three-fund portfolio...

Post by grabiner » Mon May 18, 2015 11:32 pm

NYGIANT wrote:FYI I have decided that an asset allocation of 60% equities(36% domestic/24% international) and 40% bonds(28% domestic/12% international), with an 8-10 year window, suits my particular situation best. Currently my investable assets break down as follows: 40% TSP, 10% Roth IRA, 5% Traditional IRA and the remaining 45% in taxable accounts.


Since you have multiple accounts, you should take advantage of the best options in each account. The TSP G fund is better than any bond fund Vanguard offers, either domestic or international. Therefore, I would use:

40% G fund in TSP
24% Total International in taxable
36% Total Stock Market in the remainder of taxable, and in both IRAs

If the TSP grows to be more than 40% of your portfolio (for example, if you roll the Traditional IRA into it), use 80% C and 20% S there to replace some of the Total Stock Market.
David Grabiner

mxs
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Re: Thrift Savings Plan and three-fund portfolio...

Post by mxs » Mon May 18, 2015 11:39 pm

grabiner wrote:The TSP G fund is better than any bond fund Vanguard offers, either domestic or international.


Comparing the G fund 10 year return of 3.19% to VBTLX at 4.72%. Every other Vanguard Index Bond fund that is 10 years old or older beats 3.19%. Why do you say the G fund is better? (Honest question)

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grabiner
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Re: Thrift Savings Plan and three-fund portfolio...

Post by grabiner » Mon May 18, 2015 11:47 pm

mxs wrote:
grabiner wrote:The TSP G fund is better than any bond fund Vanguard offers, either domestic or international.


Comparing the G fund 10 year return of 3.19% to VBTLX at 4.72%. Every other Vanguard Index Bond fund that is 10 years old or older beats 3.19%. Why do you say the G fund is better? (Honest question)


All investing is a trade-off between risk and expected return. The expected return on a bond fund is its yield, what you will get if you hold all those bonds to maturiy. The G fund has the yield of an intermediate-long Treasury fund, with zero risk. Other bond funds have interest-rate risk; if rates rise, bond prices fall. Thus using the G fund as part of your portfolio can give you an equal return with less risk, or a higher return with the same level of risk.

In the last ten years, this risk didn't show up. Interest rates fell, and thus the returns of almost all bond funds have exceeded their yields, but there is no reason to expect that to continue.
David Grabiner

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M_to_the_G
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Re: Thrift Savings Plan and three-fund portfolio...

Post by M_to_the_G » Mon May 18, 2015 11:59 pm

mxs wrote:
grabiner wrote:The TSP G fund is better than any bond fund Vanguard offers, either domestic or international.


Comparing the G fund 10 year return of 3.19% to VBTLX at 4.72%. Every other Vanguard Index Bond fund that is 10 years old or older beats 3.19%. Why do you say the G fund is better? (Honest question)


Well, it has long term treasury interest rates without any market risk, credit risk, or risk of losing principle. There is inflation risk, but very little volatility of earnings. It's a "free lunch," if you will: a short term security with long term returns.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

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Jerry55
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Re: Thrift Savings Plan and three-fund portfolio...

Post by Jerry55 » Tue May 19, 2015 12:06 am

grabiner wrote:All investing is a trade-off between risk and expected return. The expected return on a bond fund is its yield, what you will get if you hold all those bonds to maturiy. The G fund has the yield of an intermediate-long Treasury fund, with zero risk. Other bond funds have interest-rate risk; if rates rise, bond prices fall. Thus using the G fund as part of your portfolio can give you an equal return with less risk, or a higher return with the same level of risk.

In the last ten years, this risk didn't show up. Interest rates fell, and thus the returns of almost all bond funds have exceeded their yields, but there is no reason to expect that to continue.


NYGiant ~ I agree with most posts above, but mostly with this piece of advice.

I retired CSRS after 39 years in 2012 @ 57, and in March 2015, went from 100% C Fund to 50% C, 25% S and I.
My only other holdings are Vanguard Wellesley (rIRA) and Wellington + Dodge & Cox International (taxable)
While my pension provides everything I need, I've been thinking about what to do when RMD's start in 10 yrs.
I've looked at multiple Vanguard Funds over the years, but as grabiner mentioned above, the G and L Income funds stood out much more. WHERE can I get income with NO RISK ???

My answer then became the G fund, or possibly the L Income fund as an alternative, or maybe both.
You can't beat the income from the G Fund for the most part without risk, and looking at the returns over the last 20 years, it's managed to beat inflation (last time I looked) every single year. Interest rates WILL be going up, so maybe, as far as your TSP is concerned, G or L income may be as good an alternative as can be.

Good Luck ~ You'll love retirement. :happy
Retired 12/19/2012 @ age 57 | Good Bye Tension, Hello Pension !!!

rkhusky
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Re: Thrift Savings Plan and three-fund portfolio...

Post by rkhusky » Tue May 19, 2015 6:49 am

If you do decide to go with a G Fund heavy portfolio, just remember that the government can change the rules at any time. There has been some recent scuttlebutt that they may make the return of the G Fund more commensurate with the risk. So, while you should plan based on current rules, it is prudent to have a backup plan in case things change.

texasdiver
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Re: Thrift Savings Plan and three-fund portfolio...

Post by texasdiver » Tue May 19, 2015 8:18 am

rkhusky wrote:If you do decide to go with a G Fund heavy portfolio, just remember that the government can change the rules at any time. There has been some recent scuttlebutt that they may make the return of the G Fund more commensurate with the risk. So, while you should plan based on current rules, it is prudent to have a backup plan in case things change.


Do you have a reference for this "scuttlebutt?"

As far as I am aware the G-Fund operates the same as it did when it was created in 1987 and I have not seen any mention of proposals to change it. Why would the do so? It's not like retirees have been making any sort of windfall killing in the G Fund in recent years that would raise eyebrows. It's been about 2%.

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M_to_the_G
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Re: Thrift Savings Plan and three-fund portfolio...

Post by M_to_the_G » Tue May 19, 2015 8:45 am

texasdiver wrote:
rkhusky wrote:If you do decide to go with a G Fund heavy portfolio, just remember that the government can change the rules at any time. There has been some recent scuttlebutt that they may make the return of the G Fund more commensurate with the risk. So, while you should plan based on current rules, it is prudent to have a backup plan in case things change.


Do you have a reference for this "scuttlebutt?"

As far as I am aware the G-Fund operates the same as it did when it was created in 1987 and I have not seen any mention of proposals to change it. Why would the do so? It's not like retirees have been making any sort of windfall killing in the G Fund in recent years that would raise eyebrows. It's been about 2%.


It's been in the news. A quick web search will show that. Yes, it's no "windfall killing" for individuals, as you put it, but due to the size of the fund, it costs taxpayers a lot of money for Uncle Sam to provide feds with that extra layer of risk protection. That said, congress makes threats along those lines all the time. I agree with you that such drastic changes are unlikely.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

MichDad
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Re: Thrift Savings Plan and three-fund portfolio...

Post by MichDad » Tue May 19, 2015 12:00 pm

This quote is from the March 23, 2015 minutes of the Federal Retirement Thrift Investment Board:

"Ms. Weaver reported that the committee report accompanying the House resolution offered examples of how such savings could occur, which included increased contributions to the defined benefit portion of the Federal Employees Retirement System ("FERS"), increased attrition in federal employee rates, and a change to the G Fund interest rate from the current average yield of all U.S. Treasury securities with 4 or more years to maturity to a three-month maturity. Ms. Weaver noted that this change would create a significant negative impact to the utility of the G Fund for participants." [Emphasis added.]

Kimberly A. Weaver is the Director of External Affairs for the FRTIB. Here's the link to the minutes:

http://www.frtib.gov/MeetingMinutes/2015/2015Mar1.pdf

MichDad

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Re: Thrift Savings Plan and three-fund portfolio...

Post by Jim180 » Tue May 19, 2015 12:25 pm

MichDad wrote:This quote is from the March 23, 2015 minutes of the Federal Retirement Thrift Investment Board:

"Ms. Weaver reported that the committee report accompanying the House resolution offered examples of how such savings could occur, which included increased contributions to the defined benefit portion of the Federal Employees Retirement System ("FERS"), increased attrition in federal employee rates, and a change to the G Fund interest rate from the current average yield of all U.S. Treasury securities with 4 or more years to maturity to a three-month maturity. Ms. Weaver noted that this change would create a significant negative impact to the utility of the G Fund for participants." [Emphasis added.]

Kimberly A. Weaver is the Director of External Affairs for the FRTIB. Here's the link to the minutes:

http://www.frtib.gov/MeetingMinutes/2015/2015Mar1.pdf

MichDad
The proposed change to the G Fund was part of the 2016 House Budget bill, however after members of the House and Senate met to resolve differences on the bill the proposed change to the G Fund was removed from the final version of the bill. So the G Fund is safe for now, however Congress could always bring it up again in future budget discussions.

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The Three Fund Portfolio

Post by Taylor Larimore » Tue May 19, 2015 12:36 pm

After years of actively "managing" my own investments, and now nearing retirement, I've decided to take the more passive approach of the three-fund portfolio. After extensive reading on this subject, and from my own personal investing experience, I have become a believer. Its simplicity and long term results are a thing of beauty, IMHO.

NYGIANT:

Welcome to the Bogleheads Forum!

Like you, it took me a long time to become a believer.

This is a link to The Three Fund Portfolio and its many advantages.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Taylor Larimore
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The Three Fund Portfolio

Post by Taylor Larimore » Tue May 19, 2015 12:38 pm

NYGIANT:

Welcome to the Bogleheads Forum!
After years of actively "managing" my own investments, and now nearing retirement, I've decided to take the more passive approach of the three-fund portfolio. After extensive reading on this subject, and from my own personal investing experience, I have become a believer. Its simplicity and long term results are a thing of beauty, IMHO.

NYGIANT:

Like you, it took me a long time to become a believer. This is a link to The Three Fund Portfolio and its many advantages.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Thrift Savings Plan and three-fund portfolio...

Post by abuss368 » Tue May 19, 2015 12:51 pm

Welcome to the forum.

The Three Fund Portfolio is an excellent portfolio. You will enjoy the simplicity and the results.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Thrift Savings Plan and three-fund portfolio...

Post by grabiner » Tue May 19, 2015 10:20 pm

MichDad wrote:This quote is from the March 23, 2015 minutes of the Federal Retirement Thrift Investment Board:

"Ms. Weaver reported that the committee report accompanying the House resolution offered examples of how such savings could occur, which included increased contributions to the defined benefit portion of the Federal Employees Retirement System ("FERS"), increased attrition in federal employee rates, and a change to the G Fund interest rate from the current average yield of all U.S. Treasury securities with 4 or more years to maturity to a three-month maturity. Ms. Weaver noted that this change would create a significant negative impact to the utility of the G Fund for participants." [Emphasis added.]


This is only a proposal, and there is no point in doing anything unless the rules are actually changed, because there is no net cost; the G fund won't lose its current value if the rules change. If the rules change to make the G fund less attractive, TSP investors can then sell the G fund then to buy the F fund, or to buy stock funds and sell stocks in other accounts to buy bond funds. But while the rules remain the same, the G fund is the best bond investment for most TSP investors.
David Grabiner

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Re: Thrift Savings Plan and three-fund portfolio...

Post by DonC » Tue May 19, 2015 11:56 pm

I recently changed my contribution allocation to G Fund: 55%, C Fund: 40%, S Fund: 5%. Although I am currently heavily weighted in G Fund (due to past ignorance of investing basics) I am leery of reallocating a significant amount of the G Fund money into C Fund and S Fund at this time due to the current high pricing of the stock market.

NYGIANT
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Re: Thrift Savings Plan and three-fund portfolio...

Post by NYGIANT » Wed May 20, 2015 6:11 am

Thanks to everyone for their insight and contributions! You have given me food for thought and I will definitely do some more reading and research and will be sure to ask for more advice in the near future. I can see where this forum can become somewhat addictive - in a good way. Looking forward to retirement and having free time to participate here, thanks again!

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Re: Thrift Savings Plan and three-fund portfolio...

Post by 209south » Mon Sep 05, 2016 9:38 pm

My apologies for bringing up an old post, but I was asked today to review the investment options for a young friend who is a recent Naval Academy grad and aspiring pilot. I was disappointed with my preliminary review of the Thrift Savings Plan...am I reading correctly that the expense ratio for all funds is 29 basis points?? If so, I find it mildly outrageous that these plans are the best we can offer our young fighting men and women?

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Re: Thrift Savings Plan and three-fund portfolio...

Post by Grt2bOutdoors » Mon Sep 05, 2016 9:57 pm

209south wrote:My apologies for bringing up an old post, but I was asked today to review the investment options for a young friend who is a recent Naval Academy grad and aspiring pilot. I was disappointed with my preliminary review of the Thrift Savings Plan...am I reading correctly that the expense ratio for all funds is 29 basis points?? If so, I find it mildly outrageous that these plans are the best we can offer our young fighting men and women?


No, you are reading it incorrectly. The expense ratio charged is 2.9 basis points, not 29 basis points. The TSP is being charged at institutional level pricing. You can not get better than that, well, maybe, but those places are far and few between.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Thrift Savings Plan and three-fund portfolio...

Post by 209south » Mon Sep 05, 2016 10:09 pm

Thank you - happy to hear!

retiredjg
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Re: Thrift Savings Plan and three-fund portfolio...

Post by retiredjg » Tue Sep 06, 2016 6:44 am

209south wrote: If so, I find it mildly outrageous that these plans are the best we can offer our young fighting men and women?

Many people (I'm one) think that the TSP is the best plan on the planet. :happy

The G Fund offers some unique opportunities as well. Here's more information. https://www.bogleheads.org/wiki/Thrift_Savings_Plan

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Re: Thrift Savings Plan and three-fund portfolio...

Post by soboggled » Tue Sep 06, 2016 9:44 am

retiredjg wrote:
209south wrote: If so, I find it mildly outrageous that these plans are the best we can offer our young fighting men and women?

Many people (I'm one) think that the TSP is the best plan on the planet. :happy

The G Fund offers some unique opportunities as well. Here's more information. https://www.bogleheads.org/wiki/Thrift_Savings_Plan

Correct. Members of Congress have access to the same federal Thrift Savings Plan that all federal employees do. Does anyone think that a program designed by Congress for Congress is going to be a bad deal for them? The federal government matches contributions up to 5 percent, in addition to a 1 percent giveaway whether or not the employee contributes.
The fund choices are simple but quite adequate, including large cap, small cap and international funds plus a short and longer term fixed income funds that routinely beat their market benchmarks by a small margin. Where else do you pay only $.29 on each $1000 invested? Where else is there a special G (fixed income) fund with special rates for federal employees only, providing long term rates at short term risk? Most investors would be very happy with the choices and their simplicity insures that investors will make no big mistakes. In fact, the lack of REITs and international bonds are an advantage IMO. Negative aspects are the lack of TIPS but the program was designed for accumulators, not retirees when inflation protection becomes far more important, so in that regard it is a plus - and the G fund provides superior inflation protection anyway. Federal retirees would do well to just stay in the program as long as possible.
(As far as the three-fund portfolio goes, these funds can approximate it well enough.)

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