TSP G Fund: A Ponzi scheme with minuscule returns

By Sam •  Updated: 01/05/22 

I will never forget it.

I was having a casual conversation with a colleague when he bragged about having 100% of his TSP in the G Fund.

He told me about how he thought about putting some in stocks but then the market crashed in ’08 and he was sure glad he never got around to changing his TSP allocation.

I was so busy trying to raise my jaw off the floor that I didn’t mention that even if he would have invested the day before the ’08 crash, his portfolio would have seriously outperformed the G Fund. (By a lot).

Sadly, my coworker isn’t the only one with all of his nest egg tied up in the G Fund. Even worse- too few of my colleagues understand that the G Fund doesn’t really exist in the same way that the other funds do.

If you have a TSP, you need to read this post and understand the truth about the G Fund.



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.

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Understanding your TSP investment options

Federal employees, including uniformed services members, participate in the Thrift Savings Plan, or TSP as part of their retirement plan.

Unlike a 401(k) which contains mutual funds, the TSP has trust funds operated by the Comptroller of the Currency. There are 5 TSP Funds:

The G Fund is one of the biggest funds in the TSP

TSP Participants hold over $210 billion dollars worth of the G Fund. In fact TSP investors hold more G Fund than they do Lifecycle Funds. (Lifecycle funds are a set-it-and-forget-it option for people who want their retirement plans on autopilot.)

TSP Asset allocation August 2021 showing how much of the TSP is invested in the TSP G Fund
TSP Asset allocation as of August, 2021. Data from the Federal Retirement Thrift Investment Board.

While you cannot deny that the G Fund is popular among federal employees, I think it’s worth evaluating what the G Fund actually invests in and whether or not it is a good fit for federal employees.

The G Fund is the most conservative fund within the TSP

In the broadest terms, mutual funds can be classified by the type of assets they hold. The TSP contains three TSP Stock Funds that hold equity stakes in companies.

The F Fund and G Fund contain bonds (government and high quality corporate debt).

While the G Fund can be thought of as a “bond fund” in your portfolio, it is important to understand that not all bond funds are made equally.

The G Fund is comprised of special short-term U.S. Treasury securities that are “non-marketable”. In other words, the federal government makes special bonds especially for TSP participants.

Because the bonds are non-marketable, they cannot lose value. (The bonds within the F Fund can lose value due to interest rate risk. If long-term interest rates increase, the value of existing bonds decrease since investors can buy new bonds with higher yields).

Simple diagram showing how interest rate risk works.

Why the G Fund is a good deal

The G Fund gives TSP investors the investment returns of a long-term government bond with no risk of loss of principal.

In other words, the G Fund has the liquidity of a money-market fund with the rate of return of long-term government securities.

Therefore, the G Fund is a rare exception to the risk/reward tradeoff typically found in investments. You get more reward than a savings account with no additional risk.

However, before you get too excited and transfer all your money to the G Fund, you should know that investing in the G Fund is not risk free. You are still susceptible to inflation risk (the risk that prices rise faster than your nest egg).

There are no G Fund private sector counterparts

Let’s face it, the G Fund is weird. The Government creates special bonds that it sells only to fund created by the Government. If you read the prospectus, they talk about how the G Fund “does not have transaction costs” because it only exists electronically. (Translation: your G Fund portfolio is just entries in a government spreadsheet.)

If you want more details about what is in the TSP, TSPLF14 states that:

The G Fund, Debt Ceiling, and Ponzi schemes

The unique attributes of the TSP G Fund have also made it a tool for the U.S. Government to avoid default. The G Fund uses government trust funds to purchase special non-marketable bonds that the government issue.

Over the past decades, when the debt ceiling debate rages in congress, the Treasury Department invokes “extraordinary measures” to avoid the risk of default.

What this means is that they use the ~$200 billion on the books in the G Fund to pay the government’s bills until Congress raises the debt limit.

As a TSP participant, these extraordinary measures don’t affect you. You can still withdraw money from your TSP whenever and however you like. (Individual TSP investors can’t easily liquidate billions of dollars in a single business day). Likewise, the your account statements continue to show a positive return on your G Fund investments, equal to the average rate of the 153 U.S. Treasury securities in the portfolio. (However, the government loaned those securities out to someone else).

In the end, these extraordinary measures are just an accounting trick.

However, it’s hard to not think of the G Fund as a $200 billion dollar Ponzi scheme. (No, it’s not as risky as a Bernie Madoff Ponzi scheme… the U.S. Government guarantees your return.)

My point is that the G Fund is just a contract between you and the government to earn a guaranteed interest rate. What they do with your G Fund deposits is extremely opaque.

Is the G Fund too conservative?

The primary objective of the G Fund is the preservation of capital. If you have a very low risk tolerance and want to keep your retirement nest egg intact you may wish to consider the TSP G Fund.

However, 2021 was a great example of how the G Fund can be too conservative. G Fund returns did not keep up with the cost of living. While you will never have negative returns with the G Fund, annual returns may not keep up with inflation.

If we look at inflation adjusted returns, the G Fund has had several years of negative returns since 2010.

While the TSP G Fund always has positive nominal returns, it’s actual (inflation-adjusted) returns have been negative in 6 of the past 11 years.

Investment objectives change as you age. Retirees interested in capital preservation will obviously want to have investment portfolios that are heavily invested in bonds such as the G and F Funds.

On the other hand, I don’t see a reason why someone in their capital accumulation phase would want to hold any G Fund.

Note, I’m not a financial advisor and certainly not your financial advisor, don’t do something dumb with your money after reading a blog)

The Trinity Study

If you are a finance nerd like me, you’ll be familiar with the Trinity Study, which looks at the likelihood that you will outlive your portfolio. The Trinity Study spawned the “4% rule”- that you can safely withdrawal 4% of your assets each year in retirement.

What does the The Trinity Study have to do with the TSP G Fund? The Trinity Study used “long-term corporate bonds” as the bond fund in the portfolio. So if you’re counting on a 4% safe withdrawal rate from your portfolio, you cannot have all of your bond market portfolio in the G Fund.

(And you surely can’t have 100% of your retirement savings in the G Fund. The Poor Swiss recently performed a similar analysis to the Trinity Study and found that a portfolio with 100% bonds was the most likely portfolio to fail.)

The G Fund returns are decreasing

Finally, it is worth noting that the G Fund isn’t what it used to be. The 2000’s ushered in the time of super low (and even 0%) interest rates. Our current economy is based upon low interest rates and aggressive monetary policy.

TSP G Fund annual returns since 1988. Data from the TSP website.

While I can’t predict the future, I have a hard time imagining what a return to 6% interest rates would look like for the US. We’re addicted to low interest rates.

Therefore, while the G Fund may have returned 8% back when you started your government career, I don’t think you can count on that happening again in your retirement.

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Summary- Make sure you understand the G Fund before investing in it

Yes, it is impossible to lose money in the TSP G Fund. But that doesn’t mean that the G Fund will help you achieve your investment objectives.

Hopefully you now have a better understanding of what the G Fund is and how it fits into your financial plan.

Want to discuss the article with other federal workers? Head on over to our Facebook Group.

Want to read more about the TSP? Check out my 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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