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Federal Employees: Understanding the G Fund

Written by
January 3, 2018

If you are a Federal Employee, then you (should) know the G fund. April 2017 marked the funds 30th anniversary since inception in 1987. Not only is it the oldest, it is also the most popular investment on the Thrift Savings Plan (TSP) platform and unlike any other investment available.

“The payment of G Fund principal and interest is guaranteed by the U.S. Government” and the “interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity.”[1]

What does this mean? G fund investors are awarded long-term Treasury bond yields with essentially no downside risk Ie: interest rate and default risk.

By nature people are risk adverse. That is why, if given the choice, most would rather not lose $10 than be given $10. Said another way, losing hurts more than the benefit of winning. Owning the G fund makes sense to investors, psychologically, but is that the right choice for your retirement savings to the TSP?

The chart below reflects savings and returns over time to not only the G fund, but to the S&P 500 Index, Aggregate Bond Index and a blend of the latter two staple investments.

What does this tell us?

  • Know where you are headed. Many times our focus is on the investment instead of the objective. If you have not taken the time to develop a personalized financial plan, do so. A comprehensive plan will illustrate how to invest based on todays and tomorrows goals.
  • Slow and steady wins the race, if that is the point of the race. By utilizing the G Fund, understand what you are gaining/giving and ensure the investment fits. If the financial plan determines the G fund has enough return potential, great!
  • Don’t put all of your eggs in one basket. Diversify your risk over multiple asset classes. Even though the S&P 500 wins the race in this example, you would have lost if the race ended in 2008. Instead, spread your risk over different areas of the broader markets. Diversification does not work every time, but it does work over time.

 

Brent Ulreich is a financial advisor, Certified Financial Planner(CFP), and Chartered Federal Employee Benefit Consultant (ChFEBC℠). Click here for Brent’s full biography.

 

Sources:

[1] https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_G.html

https://www.tspdatacenter.com/annual_rates

https://www.tsp.gov/representative/Content/TSPResources/

 

DISCLOSURES: PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS. This report is based on data obtained from sources we believe to be reliable. Hefren- Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions andestimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.