By July, the collapse of the subprime mortgage market was throwing investors around the world into a crisis.
The dollar fell to a record low against the euro July 12. Two weeks later, the Dow Jones industrial average had its biggest point drop since February. And concerns about the state of the U.S. economy hurt international stock markets from London to Tokyo.
But experts say at least one group has little to fear from the subprime fallout: investors in the Thrift Savings Plan lifecycle funds.
"We're seeing the benefit of diversity there," said Mike Miles, a financial planner and investment columnist for Federal Times, a Military Times publication.
The five L Funds invest participating federal employees' and service members' retirement savings in mixes of TSP's stock, bond and government securities funds, varying the mix based on when a participant expects to begin making withdrawals. As time passes and participants approach retirement, their money automatically moves to an L Fund with lower-risk, lower-return investments.
That structure has allowed the L Funds to weather market fluctuations such as the subprime crisis since they were introduced two years ago, experts say.
"The L Fund is the place to be," said Gregory Long, executive director of the Federal Retirement Thrift Investment Board, which oversees TSP. But while the board is happy with the L Funds' performance and says it is growing faster than expected, most participants are still investing halfheartedly and are not getting the full value for their savings.
An L Fund's mix of investments is based on how long one has until retirement. The funds of those expected to retire by 2008 are invested conservatively: heavy on securities that are dependable but provide less reward, and light on international stocks that can provide big payoffs but also can be volatile.
Funds from younger federal employees or service members expected to retire after 2034 are invested more aggressively. These higher-risk investments can reap big payoffs, and if they collapse, they have decades to recover.
Long said those who want to get the most out of the L Fund should invest all their TSP contributions in the L Fund — and two-thirds of participants aren't doing that.
Long suspects it is because federal employees and service members may be reluctant to trust a new investment opportunity, and may feel it's safer to spread their money around.
"For decades, people have been told not to put all their eggs in one basket," Long said. "That message is now changing."
But Miles stops short of recommending all his clients use the L Fund because he thinks it is invested too conservatively.
L Fund investors automatically are moved to safer fund balances too quickly, Miles said, and they could end up not having enough savings to last them comfortably through retirement.
But Miles said that the L Fund is a "step in the right direction." He applauded the various asset allocations that Mercer Investment Consulting Inc. has developed for the L Fund, and feels the average investor would be better served there than by putting his savings in one or two funds.
"Every investor who is five or more years away from retirement should use all five funds," Miles said.
Miles said that the TSP should let L Fund investors delay their moves to safer fund balances if they choose.
TSP board spokesman Tom Trabucco said that is not being considered. He said Mercer re-examines the L Fund balances every year and adjusts them if necessary to keep them as efficient as possible.
Miles also recommends that participants time their fund withdrawals to their life expectancy, rather than to the time of retirement, as TSP recommends.
Long doesn't want to force anyone to invest in the L Funds, but says that a massive show of support from the TSP board and Congress will encourage wary investors.
In July, the board asked Congress to make the L Fund the default fund for enrollees. Today, new or returning employees or service members who sign up for TSP but don't choose a fund are automatically enrolled in the G Fund, or government securities, which traditionally offer the lowest risk and lowest reward of all investment options.
Miles stressed that the worst decision anyone could make is to leave all his assets in the G Fund.
Long said Congress is interested in the board's proposal but took no action before recessing in August.