Will the Government Ever Get Rid of the “Free Lunch” of the TSP G Fund?

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They say there’s no free lunch, but in the Thrift Savings Plan there is a free lunch, and it’s called the G Fund. Will the government get rid of this free lunch?

The G Fund Free Lunch

What is this free lunch? You can read about it on this page in the Rewards section:

The G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates.

The government is paying you a higher interest rate than it should. That is the G Fund free lunch.

Why is the Free Lunch at Risk?

The government periodically considers getting rid of it. For example, you can read about it in this article, which is discussing the President’s FY19 budget plan/request. Here’s the relevant portion:

The plan also proposes reducing the statutorily mandated rate of return for the government securities (G) fund to be based on either the three-month or four-week Treasury bill, at a projected savings of $8.9 billion over 10 years.

“G Fund investors benefit from receiving a medium-term Treasury Bond rate of return on what is essentially a short-term security,” the White House wrote. “The budget would instead base the G-fund yield on a short-term T-bill rate.”

TSP spokeswoman Kim Weaver said changing the G Fund’s yield, which is currently 2.75 percent annually, would have a disastrous effect on participants’ ability to save for retirement. If Congress changed the G Fund to track the three-month Treasury bill, the yield would decrease to 1.46 percent, and for the four-week bill it would drop to 1.43 percent.

“Such a change would make the G Fund inadequate and ineffective from an investment standpoint for TSP participants who are saving for retirement,” Weaver said in an email. “More than 3.6 million TSP participants (69 percent) have all or some of their account balance invested in the G Fund. Of those with money in the G Fund, 2 million (39 percent) hold the G Fund as their sole investment choice.”

For a TSP participant who has just retired and is invested entirely in the L Income Fund, which is designed for people who have begun taking annuity payments, they would run out of money at age 84 instead of the current projected age of 92, Weaver said.

Jessica Klement, staff vice president for advocacy at the National Active and Retired Federal Employees Association, said the change would make G Fund investments “useless” and likely force TSP administrators to divest from it entirely.

“[The new rate] would not even keep up with inflation,” she said. “So if you wanted to keep your money in a mostly secure fund, you would not be getting any return, and you’d actually be losing money. And if you took your money out, there would be no other safe, secure investment for those nearing or in retirement.”

What Does This Mean For You?

Right now, it means nothing. This is all just discussion about something that might happen in the future.

What you do need to understand, though, is that the G Fund serves a specific purpose in your portfolio. As the TSP site says:

Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss. If you choose to invest in the G Fund, you are placing a higher priority on the stability and preservation of your money than on the opportunity to potentially achieve greater long-term growth in your account through investment in the other TSP funds.

It is alarming that Ms. Weaver from the TSP said, “Of those with money in the G Fund, 2 million (39 percent) hold the G Fund as their sole investment choice.” Those 2 millions people are sacrificing long-term growth for the safest and most conservative investment available in the TSP.

There’s nothing wrong with that if you’re doing it because you are very conservative, near retirement, or the G Fund serves as the bond portion of a larger, more diversified portfolio that has more risky assets like stocks or real estate.

The sad reality is that most who are solely invested in the G Fund are that way because it used to be the default option for those starting a TSP account, and they never switched it to a more aggressive investment option. Under the new Blended Retirement System, the default investment switched from the G Fund to an age-appropriate Lifecycle fund.

What’s the Bottom Line?

The G Fund gives you a free lunch, paying you a higher long-term interest rate while you are investing in short-term securities. The government periodically talks about getting rid of that free lunch.

If you are invested in the G Fund, make sure you are doing it purposely and are aware of its conservative nature. Its emphasis is on preserving wealth rather than growing wealth.

9 thoughts on “Will the Government Ever Get Rid of the “Free Lunch” of the TSP G Fund?

    Adon navarette said:
    July 13, 2020 at 11:30

    Thank very much!! Very much needed!


    Glenn A Reeman said:
    July 16, 2020 at 00:07

    On January 1.. 1984 the new federal employees retirement system came to replace civil service program. New federal employees would be covered under social security while civil service employees were not .This was to bolster the social security system. The Thrift saving plan was part of that change,,, the g fund along with other funds .Were were free lunches then? Why today? This program had bipartisan support and with the Reagan administration in support of it. FERS benefits are not as liberal as civil service. Corporate greed will not stop until all retirement benefits are removed. The G fund is like a loan to the government and as we tex pays .74 percent for year. Less then 1 percent. Talk about greed!!


    Glenn A Reeman said:
    July 16, 2020 at 00:21

    The G fund rate of return for may was .06 and june that’s a .72 return annually.. Less then 1 percent. Free lunch for who? The federal reserve most love this. But some what all retirement benefits for workers stopped. Greed is the answer.


      Joel Schofer, MD, MBA, CPE responded:
      July 16, 2020 at 09:14

      Random question…how did you get to this article? I’m noticed a ton of traffic reading it, but I have no idea why or how readers are finding the article.


      David Hall said:
      July 19, 2020 at 17:22

      Free lunch? The government uses the G fund and pays interest to use it. For multiple decades the G fund has paid far less than market value. How is the G fund making alittle more than the S and C in this current time a free lunch?


    Jack Trainer said:
    July 17, 2020 at 15:20

    I’m confused as to why the G Fund would be considered a short-term security. Most of the deposits in the G fund are left there for decades. The G fund is also the basis for all of the lifecycle funds. Congress likes to raid the G fund to avoid government shutdowns, so i’d say leave the G fund alone.


      Joel Schofer, MD, MBA, CPE responded:
      July 18, 2020 at 07:27

      You can invest money for the long-term in what are short-term securities. For example, you could keep you money in a short-term Treasury mutual fund or ETF for 50 years, but that money will just keep getting reinvested in new bonds when the short term ones return the principle invested. Also, Congress does not “raid” the G Fund. It does periodically get why I’ll call “put on hold” when the Federal Government is up against a debt ceiling because it can’t issue new debt and that is what the G Fund is…the government issuing debt to TSP investors.

      Thanks for reading, and again, if anyone can tell me how all of these readers are making their way to this article, I’d love to know!


        Glenn A Reeman said:
        July 18, 2020 at 15:29

        While the government can’not borrow when the debt ceiling is maxed out it does take the g fund money for government operations. .Then when it as been raised its returned with interest.. The g fund is like saving bonds t bills its loaned to the government for interest. Since what 2008 the interest rates low return small. Its probably a win win for funding government operations and members of the tsp who choose to be safe. And inter fund transfer from earning in stock market then to g fund helps government funding .


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