Ah, the allure of the G fund. A popular fund that is invested in treasury securities, and traditionally one of the safest investments available, the G fund is guaranteed by the federal government.
Barring the total collapse of the United States government, the government pays the interest. The “safety” and backing of Uncle Sam earmarks this fund as a very attractive option for those investing in the Thrift Savings Plan (TSP).
The largest defined contribution plan in the world, the TSP is a tax-deferred savings and investment plan for federal employees. It has over six million participants, totaling over 770 billion dollars spread among its 15 funds (including the Lifecycle funds, a diversified mix of other TSP funds). Roughly 260 billion dollars—a sizable 33 percent—is in the Government Securities Investment Fund, or G fund, alone.
Don’t Confuse Safe with Risk-Free
When talking with participants of the G fund, the word “safe” is often synonymous with the fund itself. Suppose you were to analyze the fund from a volatility perspective. In that case, it is certainly not very volatile, particularly considering the volatility of some of the other funds offered by the TSP.However, though the G fund has performed exceptionally well in the past—as high as 8.9 percent in 1990—the lucrative returns achieved soon after its inception have been steadily declining.
A Brief History of Returns
First introduced in 1987, the G fund has not procured an annual return of five percent or higher since 2002. With a YTD return of 0.44 percent, the first quarter of 2022 does not appear to be off to a great start either.Although the G fund has not seen particularly profitable returns of late, one may argue that the allure of the G fund is not the belief that it will make you a TSP millionaire. It is attractive because the federal government backs it, and it cannot lose money—Uncle Sam guarantees it. Plus, who wants to watch their retirement account plunge like they did in 2008?
While it is true that the government guarantees you will (likely) never see a negative nominal return for the G fund on your statement, this does not mean that there is no risk to your portfolio, and thus your retirement.
According to the United States Bureau of Labor Statistics, the average inflation rate for the past ten years is 2.89 percent. When comparing that to the 2.04 percent average return of the TSP in the past decade, a concerning predicament materializes.
Considering inflation, the G fund would have only had an average return of 0.15 percent over the past decade. To put this into perspective, according to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate for savings accounts sits at 0.06 percent APY (annual percentage yield).
