TSP Funds Explained: What is the I Fund?

Over the past several weeks, we’ve explored the five core investment options available within the Thrift Savings Plan.

We started with the G Fund, which provides stability through special Treasury securities. We then examined the F Fund and how bonds can provide diversification while still experiencing market fluctuations. Next, we explored the C Fund, which tracks the S&P 500 and provides exposure to many of America’s largest companies. Finally, we discussed the S Fund and why it is more than simply a small-cap index.

To conclude the series, we’re looking at the fifth and final core TSP investment option: the International Stock Index Investment (I) Fund.

The I Fund provides exposure to companies outside of the U.S., giving federal employees access to a broader portion of the global economy. However, the fund has also undergone significant changes over time, making it one of the most nuanced TSP funds to understand.

What Is the I Fund?

The I Fund is designed to provide exposure to international stocks. Unlike the C Fund and S Fund, which invest in only U.S. companies, the I Fund invests in companies located outside the United States.

One inherent benefit of international investing is diversification.

The global economy does not always move in lockstep. There are periods when U.S. markets perform strongly while international markets struggle, and there are also periods when markets outside the United States outperform.

One such period is the technology boom of the late 1990s, when U.S. stocks experienced a difficult period as the dot-com bubble burst. While U.S. markets struggled during parts of that decade, some international markets performed very well.

Since no investor can reliably predict which region, country, or asset class will lead the market in the future, diversification is key to smoothing out volatility over time. By investing across different regions, industries, and economies, you may reduce your dependence on the performance of any single market.

The Original I Fund Benchmark

When the I Fund was first introduced, it tracked the MSCI EAFE Index. EAFE stands for: Europe, Australasia, and the Far East. As its name would suggest, this index focused primarily on developed international markets, including countries such as Japan, Australia, and many European nations.

At the time, this was considered a widely accepted benchmark for international investing. However, as the global economy evolved, many investment professionals questioned whether the index still provided the broad international exposure investors needed, due primarily to its lack of exposure to undeveloped international markets.

The Evolution of the I Fund

Over time, the Federal Retirement Thrift Investment Board (FRTIB) reviewed whether the I Fund’s underlying index continued to provide appropriate international exposure. After years of analysis, the board recommended updating the benchmark to provide broader global coverage. The goal was to move from the older MSCI EAFE Index to a benchmark that represented a larger portion of international markets.

The updated benchmark eventually selected for the I Fund was the MSCI ACWI IMI ex USA ex China ex Hong Kong Index. While the name is complicated, the concept is straightforward:

1. Start with the global stock market.
2. Remove the ~40% of the market that’s in the U.S.
3. Remove all companies based in China and Hong Kong.
4. The remaining international markets represent the MSCI ACWI IMI ex USA ex China ex Hong Kong Index.

This change resulted in increased emerging markets exposure, which did help make the I Fund more diversified; however, the exclusion of China and Hong Kong resulted in about ~20% of the international market being excluded from the International Fund. Not ideal.

The decision to exclude China and Hong Kong from the I Fund Index was largely political. The FRTIB experienced significant political pressure from SEnator Marco Rubio and the Trump Administration when, in 2019, their initial proposal suggested a shift to a far broader international index that included equities in both China and Hong Kong. Lawmakers and conservative groups then pressured the board to halt the updating of the index altogether, which led to a nearly five-year delay on the final policy decision. In November 2023, the board voted unanimously to adopt the current index, explicitly omitting both China and Hong Kong.

We here at Serving Those Who Serve have some complicated feelings about this pivot. In general, good investment strategy is typically agnostic. Making a unilateral decision to reduce overall diversification in the TSP for purely political purposes effectively casts the 7.62 million participants in the TSP as pawns in a political game. We believe the individuals who keep this country running deserve better. Regardless of one’s personal thoughts on China and Hong Kong, the government should not be in a position to curtail the level of diversification in the TSP or to dictate where TSP participants can invest their hard-earned wages.

International Investing Comes With Unique Risks

While we’re big fans of international diversification, investing in international markets can introduce additional considerations and risk.

Foreign investments can at times be affected by factors that are less significant in domestic markets, including currency fluctuations, political changes, regulatory differences, and regional market cycles. These factors aren’t a reason to avoid international investing, per se, as some exposure could actually reduce volatility throughout the portfolio due to the diversification they provide. However, investors should be mindful of these additional considerations when incorporating international investments as part of their diversified retirement portfolio.

Completing the TSP Puzzle

Now that we’ve covered all five core funds, it’s important to remember that each fund exists for a reason. The TSP provides access to:

• The G Fund for stability and Treasury-backed returns
• The F Fund for broad bond market exposure
• The C Fund for large U.S. companies
• The S Fund for broader U.S. stock market exposure
• The I Fund for international companies outside the United States (and China and Hong Kong)

The challenge for TSP-holders is understanding how these investment options work together within the context of your personal financial situation.

After reviewing all five core TSP funds, the most important takeaway is this:

There is no universal TSP allocation that works for everyone.

Your investment strategy should be based on your own unique circumstances, including your retirement timeline, FERS pension, Social Security benefits, other assets, financial goals, and comfort with investment risk. The right approach requires a complete understanding of your personal financial picture.

If you would like help evaluating your TSP strategy and understanding how your federal benefits work together, the team at Serving Those Who Serve is here to help. Email [email protected] to schedule your complimentary federal benefits review.

We’ll help you review your retirement benefits, understand your available options, and make informed decisions about your financial future based on your individual goals and circumstances.

Thank you for following our TSP Funds Explained series. We hope it has provided valuable insight into the five core funds available to federal employees and helped you feel more confident as you plan for retirement!

**Written by Katelyn Murray, CFP®, ChFEBC®, FBS®, CFT-1™, ECA. 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 Katelyn Murray 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. **