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The 5 Thrift Savings Plan Mutual Funds: A Behind the Scenes Look

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Members of the military and federal government civilians have a retirement plan in addition to their pensions: The Thrift Savings Plan (TSP), which is similar to a civilian 401(k) retirement plan in corporate America. The TSP is a tax deferred retirement plan in which an investor makes pre-tax contributions to the account. Then, during retirement, income tax is paid on withdrawals, including the principal, interest, any dividends and capital gains. There are five distinct index fund options for account holders to invest in.

The C Fund: S&P 500 Index

The C Fund is an index fund that invests in a stock index fund that replicates the Standard and Poor’s 500 (S&P 500) Index. It is a passively managed fund that is invested to match the S&P 500 Index regardless of the stock market’s microeconomic movements or economic conditions.

The C Fund is a great base for any investment portfolio of funds and it comprises the meat of most of the Lifecycle Funds (TSP’s target date retirement funds). Because the C Fund mirrors the S&P 500 Index, it is a great barometer for the stock market and economy as a whole. However, like the stock market, the past few years have been especially rough on the C Fund–it has a 10-year compounded annual rate of return of -0.94% and returned 26.68% and -36.99% in 2009 and 2008 respectively. Recently, the C Fund has returned 7.84% for the year to date and 16.53% over the past twelve months (as of November 14th, 2010).

The S Fund: Total Stock Market Index

The S Fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. It’s a small capitalization index fund that tracks the progress of the stock prices for the largest 2,000 companies in the United States after subtracting the five hundred largest that are members of the S&P 500.

In other words, the fund is an index fund of essentially the S&P 501-2,000, which encompasses a wide range of mid-cap to small-cap stocks and rounds out a domestic portfolio when combined with the TSP’s C Fund. The S Fund has a 10-year compounded annual rate of return of 1.69%, and in 2009 the fund enjoyed a 34.85% annual rate of return.

The I Fund: International Index

The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. The I Fund is the final rounding out of the TSP portfolio with an international flair. The fund’s focus is on developed countries of the world, not including the United States, and some of the fund’s top holdings include such internationally known companies as HSBC Holdings, BP, Nestlé S.A., Toyota Motor Corp. and Vodafone Group PLC.

The I Fund has a 10-year compounded annual rate of return of 1.10%, and a 30.04% annual rate of return in 2009.

The F Fund:  U.S. Bond Fund

The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market. This fund invests in a diverse collection of types of bonds which includes U.S. Government, mortgage-backed, corporate and foreign government bonds.

The F Fund has a relatively low risk profile; despite risks associated with all bonds remaining the same in this index fund, the overall risk of the F Fund is relatively low in comparison to the stock funds available to TSP investors. The F Fund has a 10-year compounded annual rate of return of 6.39%, and in 2009 the fund enjoyed a 5.99% annual rate of return.

The G Fund: Short Term U.S. Treasuries

The G Fund invests exclusively in a non-marketable short-term U.S. Treasury security that is specially issued only to the TSP. This is essentially a risk-free investment that is invested solely in short-term U.S. Treasuries.

The interest is guaranteed by the full faith and credit of the U.S. Government, and because of that fact, there is essentially no default risk. Further, there is no risk of loss of principal and very little volatility of earnings. The interest rate resets monthly and is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity.

The G Fund has a 10-year compounded annual rate of return of 4.62%, and in 2009 the fund enjoyed a 2.97% annual rate of return. The G Fund strives to outpace inflation and interest rate on 90-day T-bills.

The Best Kept TSP Secret–Low Fees

Because the Thrift Savings Plan and its underlying funds are index funds and not actively managed, the plan’s fees are extremely low. This low overhead allows for almost all of the funds’ gains to be passed on to the investor.

For example, the administrative expenses for the S Fund in 2009 were $0.28 per $1,000 of an investor’s account balance or 0.028% (2.8 basis points). The funds in the TSP are among the lowest cost funds available in a retirement plan.

It is important to understand the five index funds that comprise the Thrift Savings Plans and the types of investments inside each. Knowing your different options and how they interact with each other can help an investor build the perfect portfolio of investments. The right mix of these funds will help an investor balance the amount of risk and return that is wanted and needed to accomplish certain financial goals.

Hank Coleman is a Captain in the U.S. Army, freelance writer, and the founder of personal finance sites such as Military Money Might. His writing has been featured on The Motely Fool, Military.com and many others. You can follow him on Twitter at @HankColeman.