TSP Launching New L Fund

TSP participants will soon have a new L Fund in which to invest: the L 2070 Fund.

The Thrift Savings Plan (TSP) is launching the new fund on Friday, July 26, 2024. It is designed for federal employees who were born after 2004 because of its 2070 target date. There will be 11 Lifecycle funds total with the introduction of the L 2070 Fund.

Regarding this new fund, the TSP says, “You can consider investing in the L 2070 Fund if you plan to begin withdrawing from your TSP account in 2068 or later, or if you were born after 2004. Each of the eleven L Funds allow you to target the time when you think you’ll need your money.”

The L 2070 Fund will open at an initial share price of $10. Participants can begin making investment elections and fund transfers into the L 2070 Fund beginning at 12 pm eastern time on July 25, 2024. These elections will become effective on July 26, 2024.

The TSP also will be retiring the L 2025 Fund next year and introducing another L Fund, the L 2075 Fund. When an L Fund is retired upon reaching its target date, any assets invested in it are rolled into the L Income Fund which generally keeps the same target allocation.

L Funds that have a target date further into the future are more aggressive, meaning they invest more heavily in the TSP’s stock funds (C, S, and I Funds), so the L 2070 Fund will almost exclusively contain these funds.

The glide path is what determines the investment allocation for the L Funds. A glide path is a type of strategic plan for allocating investments. According to Investopedia.com, “Glide path refers to a formula that defines the asset allocation mix of a target-date fund, based on the number of years to the target date. The glide path creates an asset allocation that typically becomes more conservative (i.e., includes more fixed-income assets and fewer equities) as a fund gets closer to the target date.”

In the case of the TSP, the glide path is the strategic plan for allocating the retirement investments of federal employees who are investing in the L Funds. According to Sean McCaffrey, Chief Investment Officer at the Federal Retirement Thrift Investment Board, the glide path is reviewed by the TSP at least once every three years with more frequent reviews deemed appropriate if analysis or other events dictate that deeper examination is warranted sooner.

As a federal employee progresses throughout his or her career, the L Fund in which he or she is invested gradually shifts the money in the fund into the less volatile TSP Funds (G and F Funds) on the theory that since the employee is approaching retirement, s/he will be withdrawing the money and the risk of taking it out when the stock market drops will lead to greater losses.

This graph from the TSP illustrates this principle. The allocations below are for the current lineup of TSP L Funds as of June 30, 2024. The more aggressive funds on the left are almost exclusively invested in the stock funds whereas the L Income fund has very few of the stock funds and is heavily invested in the G Fund.

The L Funds follow a class of investment funds known as target date funds because they are basing their investment strategies on a target date, in this case, the projected date at which federal employees will retire. With the exception of the L Income Fund, the allocations of the Lifecycle Funds are adjusted quarterly (every three months).

The downside of target date funds is that when they become more conservative in their investment strategies, the returns are lower during times of high stock market returns. That is what is currently happening in 2024.

Take a look at these year-to-date returns for some of the L Funds. The L Income Fund has returned just over 5% this year, but the L 2065 Fund returned just over 13%.

The advantage, however, is that a more conservative investment strategy will shield investors against losses if they are planning to withdraw money from their accounts in the near future. This is known as sequence of return risk. A financial planner can help federal employees develop an investment strategy tailored to their individual needs.

How Many Federal Employees Invest in the L Funds?

The TSP just surpassed $900 billion in total assets, an impressive milestone for a retirement plan that was launched less than 40 years ago (1987). No doubt, it will soon exceed $1 trillion.

As of June 30, 2024, the L Funds have $224.8 billion in total assets, 24.7% of all TSP investments. 54% of TSP accounts have at least one L Fund and 39% are exclusively invested in the L Funds.

The bulk of federal employees investing in the L Funds are invested in the L 2050, L 2040 and L 2065 Funds. However, the funds with the most money in them are the L 2030, L 2040, and L 2050 Funds. The data below are as of June 30, 2024.