User:Hoppy08520/TSP role in a portfolio

The Thrift Savings Plan is a retirement plan for civilian and military employees of the United States Government.

For many TSP participants, the selection of the Lifecycle Fund closest to their desired asset allocation may be a suitable investment choice, especially if the TSP is the participant's only retirement account.

Complexity typically arises when a TSP participant has other retirement accounts or has a spouse with additional retirement accounts. In these scenarios, while a Lifecycle Fund may still be a good choice, there can be advantages to using the TSP's specific funds in a more strategic way to achieve the following objectives:


 * Compensate for inefficient or more expensive funds or asset classes in the other accounts;
 * Minimize or eliminate the need to hold the international I Fund in the TSP, owing to the I Fund's limitations;
 * For investors who want the G Fund in their portfolio, hold an outsized portion of their TSP in the G Fund, as this fund is not available outside the TSP.

Many of these considerations are explained in Asset Allocation in Multiple Accounts. This page discusses these themes from the specific perspective of a TSP participant.

Compensating for missing asset classes in other accounts
For a TSP participant who has a spouse with a 401(k)/403(b)/457(b) retirement plan, or if the participant has left Federal service and has one of these plans, then they may find that the employer plan might not have suitable choices in a particular asset class. If the investor seeks to have a diversified retirement portfolio, then the gap in the employer plan may need to be filled by holding all or more of that particular asset class in other accounts, such as the TSP. For example, suppose the 401(k) plan has no desirable fixed income fund. This may, in turn lead the investor to hold more bonds in the TSP's fixed income funds in order to get the overall portfolio's bond allocation at its target.

Following this approach, the employer retirement plan's lowest and most appropriate fund might be a S&P 500 index fund. This is a a common trait of many, but certainly not all, employer retirement plans. If the investor wants to minimize fund expenses, then the best course of action may be to concentrate all of the account in that one 500-index fund. This will, in turn, mean that the TSP account should hold a correspondingly lower amount of the C Fund, whose benchmark is also the S&P 500 Index, and more of the S Fund, which is an Extended Market (completion) fund for S&P 500 index funds.

This particular scenario is illustrated in the following scenario. Suppose an investor with a TSP seeks to have an overall portfolio with 60% stocks and 40% bonds, and with 30% of stocks in international. The TSP participant is married to a person with a 401(k) with a low-fee S&P 500 Index Fund and a moderately expensive intermediate-term bond fund; the only US small-cap stock funds and the only international funds are more expensive actively managed funds. To minimize fund expenses and work around inferior funds, the spouse with the 401(k) plan would like to concentrate her account with the 500-index fund and the bond fund. Consequently, the TSP will need to hold less C Fund and F Fund, and more of the I Fund and S Fund.

Here's an example with a TSP balance of $100,000 and a 401(k) balance of $80,000:

Looking at the spreadsheet tabs, from left to right, illustrates how this portfolio can be achieved in the two accounts.


 * Allocations tab - shows the desired percentages in each asset class: large-cap US stocks, extended market US-stocks, international stocks, bonds, and G Fund.
 * Accounts & Funds tab - shows how the specific funds in each of the two accounts are allocated in such a way as to achieve the desired asset allocations in the first tab.
 * Charts - contains three pie charts. The top chart shows the desired allocations for the overall portfolio, by asset class. The two charts on the bottom show how each of the two accounts is sliced into various funds to achieve the overall asset allocation in the top chart.

By splitting the accounts as shown in the case study above, each account is not balanced and diversified properly within each account in isolation, but when both accounts are combined into a unified whole, then the desired asset allocation targets are achieved. In this scenario, the only asset class that is held in both accounts is the intermediate-term bonds.