The C Fund- Risky or the Core of Your Portfolio?

By Sam •  Updated: 12/05/21 

“The C fund is gambling.”

I would never put my money in something that could lose value.

Have you ever heard a coworker say those things about the TSP? I know I have.

But are they actually true?

In this post, I do a deep-dive into the C fund and try to answer what it is and why you might want to hold some of the C fund in your TSP.

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Please do not confuse my personal blog for financial advice, tax advice or an official position of the U.S. Government. This post may contain affiliate links. If you make a purchase after clicking on a link, I get a small percentage of the sale at no additional cost to you.

What is the TSP?

The Thrift Savings Plan (or TSP) is one of the three major components of the FERS retirement plan. The TSP is a type of defined contribution fund, similar to a 401(k) in the private sector or a 403(b) plan. You can invest a maximum of to $20,500 per year in the TSP (as of 2022).

A “defined contribution” plan is one in which your employer contributes a certain amount (i.e. the defined contribution) each year during your employment. You, as the employee, have the opportunity to invest this money as you see fit and withdraw it upon retirement.

FERS employees have the advantage of having both a defined contribution plan (the TSP), and a defined benefit plan, or pension (the FERS annuity). The third component of FERS retirement is social security.

Investment options within the TSP

Federal employees must choose how to invest their TSP contributions. The TSP has 5 major funds that track different indices:

In addition to the individual funds, employees can choose Lifecycle funds. If you invest in a Lifecycle fund, the TSP splits your contributions among the 5 different funds in an asset allocation they feel is appropriate for your age.

When the TSP was first created in 1987, there were just 3 funds: the G Fund, the C Fund, and the F Fund. (At that time, employees default contributions were to the G fund and they could only allocate a percentage to the “riskier” common stock index fund and fixed income investment fund).

I the remainder of this article, I’m going to try to explain what the C Fund is, how the C Fund works, and reasons you might want to consider investing in the C Fund.

This educational material should not be construed as investment advice. I don’t know you or your personal financial situation. If you have further questions, please consult a financial advisor.

I made a video for you in case you’re not into reading.

Understanding how TSP contributions work

If you haven’t looked at your TSP since your hire date, I recommend you log on to the TSP website and evaluate your investments and investment balances right now.

Even if you think about your TSP from time to time, it doesn’t hurt to log on and check out your asset allocation.

You want to make sure your investments are still matching your investment goals.

While I strongly recommend you check out your account balance, I also wanted to provide some general information about the TSP so that we are all on the same page.

Are my TSP contributions automatically put into the stock market?

Thankfully, yes. However, this was not always the case. The Smart Savings Act (H.R. 4193), also called Public Law No: 113-255, mandated that new hires were automatically enrolled in a Lifecycle fund if they did not return any TSP paperwork.

Prior to the Smart Savings Act, the TSP put employees’ contributions into the G fund by default. The G fund invests in government securities. While the G fund cannot lose value, the returns of the G fund have not matched inflation.

Over the last 10 years, the G fund returned 1.94% per year. Prices rose by 2.29% per year over the same time.Therefore, federal employees who were investing entirely in the G fund were losing money (measured in purchasing power) for their retirement savings.

In contrast, according to the TSP, the Lifecycle funds are “designed to let you invest your entire portfolio in a single L Fund and get the best expected return for the amount of expected risk that is appropriate for you”.

While federal employees can always elect to have their TSP contributions spread across whatever mix of funds they choose, this default change helps place federal employees in an appropriate investment option.

Are my TSP contributions made with pretax dollars?

The TSP places contributions into a “traditional”, pre-tax account by default. In other words, the government does charge state or local taxes on TSP contributions. (However, the government charges Social Security and Medicare taxes on TSP contributions.)

When you retire and withdraw money from the traditional TSP, your withdrawals are subjected to federal and state taxes.

However, in 2012, the government introduced the Roth TSP but can withdraw money tax free in retirement.

If you’re trying to decide between the traditional and Roth TSP, I talked about pros and cons in a previous post. Ultimately the right decision for you depends upon your current tax situation and your expected tax situation in retirement. (Note that Congress may change the tax laws at any time, so trying to minimize tax in retirement with a pension involves a leap of faith).

How do I invest in the C fund within the TSP?

Investing in the C fund in the TSP is easy. The first step is to log on to the TSP website using your account credentials. If you have never logged into the TSP before, you might need to follow directions to set up your account.

Once you are logged into the TSP, there are two different types of actions that you can use to invest in the C fund: contribution allocations and interfund transfers.

Contribution allocations

You can use contribution allocations to set the percentage of your deposits being placed into various funds. For instance, my contribution allocation is 75% C fund, 25% S fund. When I am paid, the government places my contribution and the government match into the TSP. For every $100 I contribute, the government places $75 into the C fund and $25 into the S fund.

Interfund transfers

While your biweekly contribution allocations will largely determine your TSP portfolio, sometimes it becomes unbalanced. Interfund transfers allow you to rebalance your portfolio to your ideally weighted portfolio.

For example, if you contributed 90% to the C fund and 10% to the G fund, over the course of the past decade, your total portfolio balance would be more than 95% C fund since the C fund grew by 538% over that time while the G fund only increased by 23%.

You can get back to a 10% bond allocation through an interfund transfer to reset your portfolio to 90/10. Interfund transfers take effect after the trading day you enter the request (if submitted before noon Eastern time).

While interfund transfers are the easiest way to rebalance your portfolio, you might be able to rebalance it by changing your contribution allocations if the adjustments are small. Going back to the previous example, you could set your contribution allocations to 100% G fund for several pay periods until your total portfolio is back at 90/10.

Frequently Asked Questions about the C fund

What index does the TSP C fund follow?

The C fund matches the performance of the S&P 500 index. As a result, the C fund tracks the performance of the 500 largest companies in the United States. Companies are weighted in proportion to their market cap.

Therefore, the largest holdings in the C fund (and the S&P 500) are the largest companies in the stock markets; companies such as Apple, Telsa, Microsoft, and Alphabet (also known as Google). As of November 2021, the largest company in the C fund is Microsoft.

How does the C fund work?

According to the TSP, “The C Fund’s investment objective is to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies.”

Investors can contribute a certain dollar amount (or percentage of their salary) each pay period. The TSP then purchases shares (including fractional shares) of the C fund for the investor.

What are the historical returns for the C fund?

Historical returns for the C fund closely match the returns on the S&P 500. Differences between the C fund and S&P 500 returns are within a few hundredths of a percent.

From 2011 to 2021, the C fund has had an annual return of 16.24% (a total return of 451%).

Performance of the C fund compared to inflation from 2011-2021

Since the C fund was created in January, 1988, its average annual return has been 11.31% per year.

Is the C fund a good investment?

Whether or not the TSP C fund is a good investment depends upon your investment objectives. You may want to consider holding a large amount of the C fund in your portfolio if:

Furthermore, even if you are in retirement, having some of your money in stocks, like the C fund, can help you avoid running out of money retirement by beating inflation.

Note, please consider speaking with a financial adviser/counselor/CPA/other credentialed advisor before making a decision about asset allocation. Blogs, while fun and educational, are not individualized investment advice.

Comparing the C fund and the G Fund

I have talked to several coworkers in my career who want their money in the G-fund because it’s “safe”. But it’s worth talking about what safety means.

While the G fund cannot lose value (i.e. it has no market risk), its returns are much lower than the C fund.

As a result, G fund returns may not match inflation.

In fact, The G fund lost money (relative to inflation) over the past 10 years.

Performance of the G fund from 2011-2021.

And in the past year, the G fund has significantly under-performed inflation.

TSP C fund and G fund performance over the past year.

While the C fund has returned an otherworldly 40% over the past year, inflation was at 6% and the G fund returned only 1%.

Of course not every year will be like 2021. Over long periods of time, there will be periods where the C fund has negative returns.

I’m not a financial advisor, much less *your* financial advisor. I’m not suggesting any specific TSP allocation. However, I think the data is clear that if you want to beat inflation, you probably can’t have a 100% allocation in the G-fund.

Do the Lifecycle funds invest in the C fund?

Yes. All TSP lifecycle funds contain some amount of the C fund. The earlier the “target date” of the lifecycle fund, the less C fund and other stock funds it will have.

The amount of C fund in the lifecycle funds varies from 12.2% in the “L Income” fund (for current retirees) to 49.72% in the L 2065  fund.

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Summary

Hopefully, you now understand more about the C fund. If you still have questions about the C fund, join my Facebook community or check out my (free) TSP School.

Sam

Sam i.e. "Gov Worker" started working for the government at age 18 and loved it so much that he never left. He started GovernmentWorkerFI in 2019 to help fellow federal employees understand their benefits, take control of their finances, and live their best lives.

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