Throwback Thursday Classic Post – Do the TSP Target Date Funds Miss the Mark?

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Blooom is an on-line financial advisory service that will manage your Thrift Savings Plan (TSP) and other retirement accounts for pretty low fees. On another blog I wrote an article about them and some readers got into a Twitter dialogue with them. During this dialogue it was suggested that an investor doesn’t need to pay for an advisor because you can always just use target date funds if you don’t want to manage your investments yourself. Blooom’s response pointed to a blog post of theirs about target date funds and all the problems associated with them. Let’s take a look at their post and see if the points they raise are valid when compared to the TSP’s target date funds, the Lifecycle Funds.

What’s a Target Date Fund?

According to Investopedia, a target date fund is:

A fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.

The Lifecycle or L Funds are the TSP’s version of target date funds. You can read my deep dive on them if you like for more information.

Are the Lifecycle Funds Too Conservative?

They used to be too conservative when compared to other target date funds, but that was recently adjusted. In 2019, the most aggressive you could get with the L Funds was the L 2050, which was 82% stocks and 18% bonds. If you wanted less than 18% bonds, you couldn’t do that with any of the L funds, but now you can get as aggressive as 99% stocks and 1 % bonds with the L 2065 fund.

If you look at the L fund targeting the year you want to retire, though, and you think it is still too conservative for your liking, to compensate you can always just pick a L fund that targets a later year. For example, if you want to retire in or around 2030 you would normally pick the L 2030. Instead you could pick the L 2035 or L 2040 to get more aggressive.

Do the Lifecycle Funds have High Expense Ratios?

This is a definitive no. While other target date funds can have high expenses, the L funds are composed of funds with the lowest expenses you will find anywhere. You probably cannot find a target date fund with lower expenses than the TSP L Funds.

Do the Lifecycle Funds Lack Personalization?

Yes, they do. There’s no way around this one. You can personalize them a little bit by adjusting the target date you invest in, as described above, but they are by definition standard for all investors.

I would argue that these standard asset allocations are good enough for just about everyone to come up with a reasonable investment plan. If you want a personalized plan, though, you may have to get some help or use a financial advisor.

The Bottom Line – Do the L Funds Miss the Mark?

I think it depends. They are definitely low cost, so they hit the target there. They used to be too conservative, but that was fixed and you can also just adjust that by using a fund with a target date that is further off. They are definitely not personalized, but I don’t think they need to be. The asset allocations they use would do for 99% of the people investing, including myself.

5 thoughts on “Throwback Thursday Classic Post – Do the TSP Target Date Funds Miss the Mark?

    LT David Frey said:
    February 17, 2021 at 21:44

    I love the easy button. Even Blooom’s blog highlights an exception to the high expense ratio (Vanguard).
    Question: If my Life Target fund through Vanguard has an expense ratio of 0.15%, is that 0.15% in addition to the expense ratios incurred by each fund/ETF that comprises the Life Target fund? Basically, can I save 0.15% by building my own portfolio, copying that same distribution of assets, versus using the Life Target fund? I’m not averse to rebalancing every year or so, but if that 0.15% is truly the full cost….then I will stay the course w/ Life Target. Thanks for sharing, sir.
    V/r,
    LT Frey

    Like

      Joel Schofer, MD, MBA, CPE responded:
      February 18, 2021 at 09:52

      Per Investopedia – “Furthermore, as investments go, target-date funds can be expensive. They are technically a fund of funds (FoF)—a fund that invests in other mutual funds or exchange-traded funds—which means you have to pay the expense ratios of those underlying assets, as well as the fees of the target-date fund.”

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        LT David Frey said:
        February 21, 2021 at 09:28

        Thank you, sir. I assume this would also apply to the TSP Lifecycles? Either way, it sounds like my easy button at Vanguard costs me 0.15%. Time to build my own portfolio!

        Like

        Joel Schofer, MD, MBA, CPE responded:
        February 21, 2021 at 09:36

        I really don’t know. For some reason, but gut tells me that it wouldn’t apply to the TSP, but I’m not sure.

        I will say that I’m not sure you need or should build your own portfolio. You and your investor behavior is your worst enemy, and just using automatically handled target date funds may save you from yourself. If you say, “No, I’m good. I won’t misbehave.” Well, that’s what everyone says! And doctors are prone to overconfidence as well.

        I used to manage my own portfolio and recently switched back to target date funds. This was largely because of the severe market volatility of the last year and the fact that I found myself constantly monitoring my portfolio to make sure I didn’t need to rebalance. With target date funds, this is handled automatically every day. The more you mess with your portfolio, the worse you’ll do, and target date funds help to prevent you from messing with things because it is on autopilot.

        Admittedly, this switch is also because I’ve already won the game and now I’m playing not to lose. This is a different strategy that I think target date funds are particularly good for.

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    LT David Frey said:
    February 21, 2021 at 14:07

    So the 0.15% extra may be worth the gained sanity, depending on where one is in their investment stage. Thank you, sir.

    V/r,
    LT Frey

    Like

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