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Country’s Largest Defined Contribution Plan Embraces Lifecycle Funds with Stable Value-Like Investment

When Gary Amelio began looking for better ways for 3.6 million federal workers to save for retirement, he didn’t have to look far. He simply took the five investment options already offered by the federal government’s $193 billion Thrift Savings Plan and used them as building blocks to create a series of target-date lifecycle funds. Today, less than a year and a half after their August 2005 launch, those lifecycle funds are used by 10 percent of Thrift Savings Plan participants and account for more than 7 percent of plan assets.

Amelio, who calls lifecycle funds “the greatest thing for retirement plan participants since sliced bread,” is executive director of the Federal Retirement Thrift Investment Board. It oversees the Thrift Savings Plan, or TSP, a defined contribution plan operated for a wide range of federal government employees, from Capital Hill secretaries to postal workers and the military. It is the largest such plan in the country.

Speaking at the SVIA’s annual forum in Washington, D.C., in October, Amelio said he favors lifecycle funds for their simplicity, diversity, and low cost. Investing exclusively in other TSP funds, their asset allocation mix is automatically revised each quarter to gradually put more emphasis on current income and less on growth. The closer the fund gets to its target date—and the closer its investors get to their retirement date—the smaller the fund’s allocation to equities becomes. Participants who use the lifecycle funds pay no additional fees to do so; they pay only a pro-rata share of the cost of the underlying funds.

Those underlying funds include a stable value-like fund that invests in non-marketable U.S. Treasury securities with maturities ranging from one to four days, a bond fund that tracks the Lehman Brothers U.S. Aggregate index, a stock fund that tracks the Standard & Poor’s 500 stock index, another stock fund that tracks the Dow Jones Wilshire 4500 index of small-cap and mid-cap stocks, and an international stock fund that tracks the Morgan Stanley Europe, Australasia, and Far East index. The lifecycle funds themselves number five. They include four that have target dates ranging from 2010 to 2040, plus a “current income” fund. The latter has roughly 74 percent of its assets allocated to the plan’s stable value-like fund, Amelio said. The stable value-like fund is also the plan’s default investment option, he said, although that could change in the future. However, making such a change would literally require an act of Congress.

Amelio said he and his staff worked with Mercer Consulting to create the asset allocation models for the lifecycle funds, and with State Street Corp. to develop the communications programs and marketing materials needed to introduce them to plan participants. He warned that smaller plan sponsors may not find it as easy to create their own lifecycle funds, especially if they offer actively managed funds and frequently change their fund lineup. Nonetheless, the federal government isn’t the only plan sponsor to have created its own customized lifecycle funds, and if any more give credence to Amelio’s glowing endorsement of their value, it isn’t likely to be the last.

Lori Lucas, a consultant with Callan Associates who also spoke at the forum, noted that she has worked with many employers who have found it worthwhile to create their own customized lifecycle funds out of the core investment options their plans already offer. That’s been especially true, she said, where the employer’s core investment options are institutional investment accounts offering lower costs than retail mutual funds. Beyond cost savings, she said, benefits of building custom lifecycle funds with institutional investments include the ability to use best-of-class investment managers and the opportunity to include stable value funds and alternative investments, such as real estate investment trusts, in them.

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