Employees should look into 'automatic' investing

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When it comes to driving their 401(k) plan, the vast majority of federal, postal and military investors still prefer a stick-shift vehicle that requires constant attention.

But a growing number are putting some or all of their $219 billion optional retirement nest egg into Lifecycle funds (L-Funds) that automatically change investment gears, becoming more conservative as retirement nears.

The L-2040 fund is the most aggressive, having the largest allocation of stocks because its investors have more than 30 years to invest. Risk levels lessen as it is followed by L-2030, L-2020 and the L-2010. A 2050 fund is coming in three years.

The L-Income fund is for people who are tapping their Thrift Savings Plan (TSP) now or who will in the very near future. It has a larger share of Treasury securities and bonds, but still enough in the stock markets to ensure growth.

"What you have to assume," says financial planner Paul Yurachek, "is that you will live into your 90s" and need supplemental income (in addition to a federal pension and perhaps Social Security) that will keep growing.

Many professional financial planners (who either charge for their services, get commissions or both) think they can do a better job of managing a portfolio than the automated L-Fund. Many also think that the L-Funds are too conservative, meaning they have too much investment in "safe" options and not enough in the higher-risk/higher-reward stock index funds.

Other specialists, such as benefits specialist John Elliott, think there is a way around being too conservative while still having the advantage of a professionally managed fund. He says to invest in a longer-investment-horizon fund like the 2040 or 2030 that have more exposure to the stock market.

There is one mistake that many L-Fund investors make, according to Dennis Gurtz, a Bethesda-based financial planner. That mistake: Putting some but not all retirement investments into an L-Fund and keeping another portion of it in stock or bond funds. Mr. Gurtz says people who do that "are defeating the purpose of an L Fund," which is to provide a balanced-for-them portfolio.

He said that having additional investments outside of an L-Fund means, in most cases, that the person's L-Fund will always be out of balance.

But whatever experts disagree on concerning the TSP, they all agree on one thing: People should invest as much as they can, starting as early as they can.

"There is a reason Einstein said that compounding is the 8th wonder of the world," a TSP official said. Most pros say that all employees under the Federal Employees Retirement System (which covers most feds) should invest at least 5 percent in order to get the full, tax-deferred 5 percent match from Uncle Sam.

• Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@federalnews radio.com.