Managing Money

Last month’s column discussed the Thrift Savings Plan’s (TSP’s) new contribution election rule and explained that although the new rule simplifies the contribution election process, it does create more work for those who had been frontloading their catch-up contributions and wish to continue doing so. I then posed the question, is front-loading contributions worth the extra effort?

To answer this, I put together a hypothetical illustration (using the TSP’s historical returns for years 2000 through 2019) comparing the ending account values when using a frontloading contribution strategy versus a level contribution strategy. Front-loading contributions involves making larger contributions in the early pay periods to reach the annual limit in as few pay periods as possible, while the level strategy involves spreading equal contributions over all pay periods.

Technically speaking, the first year for catch-up contributions wasn’t until 2002, and the limit then was only $1,000. Regardless, I started the illustration in the year 2000 and assumed a $6,500 contribution each year. My goal wasn’t as much about showing the historical outcome as it was about highlighting the potential outcome going forward. Besides, the front-loading strategy was never limited to only catch-up contributions; a participant always had the option to frontload regular contributions as well.

In doing so, however, Federal Employees Retirement System (FERS) participants would need to reduce their contributions at some point to ensure that they contributed at least 5 percent of their pay during all pay periods. Otherwise, they would risk missing out on some agency matching contributions. This is the very issue the new single contribution election system presents, and why those who had been front-loading their catch-up contributions must now work a little harder to do so.

Only annual and monthly returns are available on the TSP’s website, so, accordingly, the example assumes monthly TSP contributions rather than the biweekly contributions most federal employees make. Furthermore, the front-loading contribution strategy is based on monthly contributions of $1,083.33 for the first six months of each year, followed by no contributions the remaining 6 months of the year, while the level contribution strategy assumes equal monthly contributions of $541.67 each year.

To keep things simple, the illustration compares the contribution strategies using just two TSP account allocations—the first is allocated 100 percent to the G Fund and the second is allocated 100 percent to the C Fund. The example is broken down into three time periods— the 10-year period ending December 31, 2009; the 10-year period ending December 31, 2019; and the 20-year period ending December 31, 2019.

As you can see in the table below, the front-loading contribution strategy—for both the 100 percent G Fund

2000 2009 $80,747 $81,685 $69,653 $69,739

2010 2019 $72,829 $73,234 $134,320 $136,994 2019 $175,502 $175,079 $383,371 $386,295

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allocation and the 100 percent C Fund allocation— produced larger ending account balances for all observed periods.

The TSP’s G Fund is invested in short-term U.S. Treasury securities specially issued to the TSP, and although the interest rate will change, the G Fund will never lose value. It, therefore, only makes sense that front-loading contributions will always produce superior results when a participant’s TSP is allocated entirely in the G Fund.

The same cannot be said, however, when a TSP allocation includes any of the four individual funds (C, S, I or F). Although the front-loading contribution strategy for the 100 percent C Fund allocation did result in larger ending account balances, there’s no guarantee this will always be the case.

In certain periods of market volatility, frontloading contributions in a TSP account that holds any fund other than the G Fund may result in a lower ending account balance. In fact, this was the case during much of the 10-year period ending December 31, 2009, when the front-loading strategy using the C Fund allocation fell behind in 2002 and didn’t regain its lead over the level contribution strategy until 2009.

Any time a discussion involves investment returns, it’s worth noting that past performance is not a guarantee of future results. Happy investing.

MARK A. KEEN, CFP®, IS PARTNER, KEEN & POCOCK, AND AN INVESTMENT ADVISER REPRESENTATIVE AND REGISTERED PRINCIPAL OF THE STRATEGIC FINANCIAL ALLIANCE, INC. (SFA). SECURITIES AND ADVISORY SERVICES ARE OFFERED THROUGH SFA.

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