Should feds invest in the I-fund? Read about what risks and potential growth come with putting money in the TSP’s international investment option.
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The I-Fund was not one of the original 3 TSP funds that began in the late ‘80s. Officially, its inception date was May 1, 2001. Along with the S-Fund, it was added to the TSP to provide more options in the retirement plan that included stocks. Before, the C-fund was the only TSP investment that included stocks. While the C-fund invests in companies that are included in the S&P 500, and the S-fund includes smaller companies than those that would be found in the C-fund, the I-fund invests in companies outside of the US. The “I” in I-fund stands for “international stocks” and includes companies with market capitalizations that are considered both medium-sized and large. Tracking the MSCI EAFE Index, the I-fund includes stocks from 21 developed countries in Europe, Asia, and the Far East (EAFE). More than 65% of the index is invested in just 5 countries: Japan (23%), the UK (15%), France (12%), Switzerland (10%), and Germany (9%) with around 32% invested in other countries’ stocks.
In the private sector’s 401(k) plans and for individual investment accounts, similar mutual funds and exchange-traded funds (ETFs) exist that also have investment portfolios that track the wide range of companies in the stock index. One of the most historically touted aspects of the TSP is the low cost, and while it remains on the less expensive side of the spectrum, the expense ratios are not as competitive as they once were.
The Risks and Potential Growth
According to the TSP website, the I-Fund contains market risk, currency risk, and possible inflation risk. Because the value of what a participant has invested in the I-fund is dependent on the stock prices of the companies included in the market index mentioned above, there is an inherent risk that the prices could drop and incur a loss. Or, if not a loss, the prices may not grow enough to outpace inflation, hence some inflationary risk. And because the investments are based in countries with non-US currencies, fluctuations of value in a country’s money could also impact the I-fund’s returns (currency risk.)
The TSP website also points out that having a diverse portfolio that includes the C-fund along with one or both of the other two stock funds (S and I) has the potential of thinning out the market risk. Adding the non-equity funds (G and F) to a TSP portfolio as well is noted as a strategy that could make a TSP participant’s investment allocation less susceptible to volatile changes in value – both positive and negative.
I-Fund Controversy
While it was once in the TSP board’s plans to switch the I-fund’s index to one that includes countries from across the globe, excluding the US, these plans have been indefinitely on hold since postponing the switch back in May 2020. Republican lawmakers, led by Senator Marco Rubio of Florida, halted the change. The aim of these efforts was to keep Chinese and Russian investments out of the TSP. Proponents of the move point to events like the current Ukraine crisis, which has caused volatility in Russian and Chinese markets, as to why the postponement should be made permanent. Opponents to this idea argue the investments federal workers rely on for retirement should not be politicized.
For help with your own TSP investments, meet with a Chartered Federal Employee Benefits Consultant (ChFEBC℠) to review your Federal Benefits.
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Until Next Time,
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
**The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you're eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.***
