Interview transcript

Arthur Stein Well, I think partly in the most recent past it’s because so many people have been fired, but this decline began in 2000. And what we’re speaking about now is net contributions, you know, the amount of money coming in compared to the amount money going out. And actually now, that total dollar amount of money being invested, the net investment. Began declining in 2000 and turned negative last year. And this year, very negative. It was, there was a minus $7.6 billion invested in the TSP this year. Which means more than $7.6 billion was taken out than came in. And so that’s obviously a very big change. I don’t think it affects the people who are now invested in the TSP. But I think, you know, obviously the popularity of the TSP Has changed, and I think fewer people are working for the government, and people who do still work for the government have the same faith in being taken care of that they used to.

Terry Gerton Could it also be that more people are starting to take their distributions?

Arthur Stein Absolutely, but you know, here we’re getting, it’s just harder and harder to say why. And I’m just pointing it out. I think, and another surprising trend was that TSP participants, TSP investors, are investing way more in stock funds than they used to. And by stock funds, I mean the C, S and I funds. And the bond funds are of course F and G, but most people don’t use F, or they use it very little, they use G. And it used to be that G was by far the most popular fund. In 2009 … more than 45% of funds in the TSP were in the G Fund and less than 25% in the C Fund and the C fund was the second most popular fund. So you know, obviously at that point, G was way more popular. Now we’re seeing the opposite. 31% of assets are in the G fund, compared to 42% in the C fund. So we’re seeing the C Fund be a lot more popular. Now, again, multiple reasons, and I don’t think anybody knows for sure, but I think one reason is the popularity of the L funds. The L funds, You know, it used to be like maybe 10% of the money was in the L funds, and that was in 2009, and now 27% of TSP assets are in L funds. And the TSP has set up the L funds so when each individual fund is first introduced, it is 99% invested in stocks. And it’s really only in the last 10 years before It matures and goes into the L income fund that you begin to see a really solid high investment into the bond funds and as a result when we look at the allocation of the L funds that people are currently invested in, 60% of their money is in funds that have it allocation to stocks of greater than 60 percent and 31 percent of the money is invested in funds that have a greater than 80 percent stock allocation. Now that’s 80 percent or higher is a very aggressive portfolio and it’s in my experience not something that many feds were interested in pursuing because they tended to be much more conservative investors. But I think most people don’t know what their L funds are invested in. You know, and another aspect of this is, and I think this is a good thing, but for new employees, they are automatically invested in an L fund that sort of corresponds to their age and when they might be retired. And I think that’s a very good thing. I mean, people can choose to change that, but most people don’t. But the ones that are being invested in are about 99% in stocks, and I don’t think the people worry about that. That’s not a terrible thing. Obviously, they’re probably younger, much longer time horizon, don’t have a lot of money already invested. The money going in is, you know, every two weeks. You know, some part, some percentage of their salary is going to be invested. So if the market crashes, it’s long-term good for those people, if they continue with that L fund investment. But it does change the allocation. And I also feel like stocks have done so well for so long, even when we’ve had market crashes they’ve been very short-term and people forget how bad it can be.

Terry Gerton Arthur Stein is a partner with Allworth Financial. So Arthur, if I go back and I kind of pull together all the threads that you just laid out there, what I’m hearing is a real generational trend in the participation of the TSP. Older workers or those who’ve left the federal government recently withdrawing and not contributing. So they are funds that were more bond-based and now they’re withdrawing those. Younger folks who are by default entering the TSP with an L-fund allocation, growing that, what does all of that mean both for the individuals and also for the operations of the TSP?

Arthur Stein Terry, I don’t think it means very much for the operation of the TSP. I mean, they’re going to do well, no matter what the allocation is. And the fact that the L funds are increasingly popular just shows how good an idea it was for them to establish those L funds. That was a big change. And it’s really worked out and it’s worked out for the employees and the decision to automatically invest new employees in an L fund if they don’t make any other decision, I think that’s a good idea too. So I’m not worried about the TSP for that reason. In terms of, is it a good for the employee, again for younger employees just starting out? I don’t see a problem. I think for a lot of older employees who have money in the L funds, they’re not paying attention to their allocation. And you know, we spoke several months ago about how taxes and inflation reduce the purchasing power of the bond funds. And of course, as these L funds mature, they go into the L income fund, which is about 72 percent, I forget the exact number, Terry, invested in bond funds and almost all of that is the G fund and that means a big chunk of their retirement funds are invested in a way that’s going to lose purchasing power. That to me is the danger, that people have too much faith in the L funds even though, you know, the L funds don’t know who they are, what their needs are, anything else. And they could easily end up in a portfolio that it was way too conservative for their needs, doesn’t increase purchasing power, and could leave them short of the money that they need later on in their retirement.

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