In a bear market, many household investors become increasingly fearful
of not only how much they should invest, or where they should
allocate regular contributions in their employer's long-term
retirement plan -- but also if they should continue contributing at all until
the market recovers.
During this time, it is often good to take a step back and review the
basic principles of a long-term retirement plan like the Thrift Savings Plan
(TSP) -- specifically how shares in the plan are invested and how dollar-cost
averaging can work in your benefit over the long haul.
What is a "share"?
A share is a unit of ownership in a company or fund. If you are a participant
in the TSP, you own shares in the funds in which you are invested.
The balances for each fund in your account are stated in shares as well as in
dollar amounts. Each TSP fund has a different share price.
How are daily share prices determined?
Each TSP fund is valued at the end of each business day and, as a result, has
a new daily share price. The new price re¬flects the change (from the previous
busi¬ness day) in the value of the assets held by the fund minus the fund's
share of the TSP's daily administrative expenses. The new share price is
determined by dividing the fund's new value by the total number of outstanding
shares in the fund.
Unlike the F, C, S, I, and L Funds, the G Fund is not affected by daily
market volatility. Instead, it earns daily interest. A new interest rate is
determined at the beginning of each month by the U.S. Treasury.
When do share prices change?
Share prices are updated each business day at approximately 7:00 p.m.,
eastern time.
Does the TSP use the new share prices for my daily transactions?
Yes. Once the new daily share prices for each fund are established,
they are applied to your account. Any transactions in your account on that day
(that is, contributions, interfund transfers, loan disbursements and payments,
withdrawals) are processed us¬ing the new share prices. (Your transactions must
be accepted by 12:00 noon eastern time in order to be processed that night using
that day's new share prices.)
Are the earnings for the TSP funds I'm invested in used to purchase additional shares in those funds?
No. Because the increase or decrease in the value of a fund (that is,
earnings) is reflected in the share price, earnings are not reported separately
or used to purchase additional shares. An increase or decrease in the value of a
fund does not affect the number of shares you own -- just their value.
How can I track the number of shares in my account?
The number of shares in your account is shown on your quarterly and annual
participant statements (and on your daily account balance on the TSP Web site at
www.tsp.gov). It is expressed to four decimal
places (for example, 131.2978), using standard rounding rules.
How does my contribution purchase shares in a TSP fund?
For CSRS participants and members of the uniformed services, the calculation
is simple -- the TSP record keeping system divides your total contribution on
the day it is posted by the share price for that day.
For example, let's say you are a CSRS participant and the portion of your
contribution you elected to invest in the S Fund equals $256.70. If the share
price for the S Fund is $11 .272 5 on the day that your pay roll contribution is
posted, the number of S Fund shares the TSP will purchase for you will be
22.7722 ($256.70 divided by $1 1.2725 = 22.77223, rounded to 22.7722).
If you are a FERS participant, the process used to calculate the number of
shares purchased by your contributions is somewhat different because your
contributions are broken down by source (that is, the employee contribution, the
agency automatic (1%) contribution, and the agency matching contribution).
The TSP purchases shares for each source separately. Therefore, for each fund
in which you are invested, the contribution amount from each source gets divided
by the daily share price. Because of rounding rules, when the shares purchased
from all three sources are added together, you could end up with slightly more
or slightly fewer shares than if you had simply divided your total overall
contribution by the fund's share price.
Example:
In the example shown here, a FERS participant's contribution to the C Fund is
calculated by source, as described above. The sum of the rounded shares
purchased through all three sources is 56.4538. This represents a difference of
.0001 from the result you would get by simply dividing the participant's total
overall contribution ($589.00) by the share price (10.4333) to arrive at 56.4539
($589.00 ÷ $ 10.4333 = 56.45385 shares, rounded to 56.4539 shares).
What is dollar-cost averaging?
Dollar-cost averaging is a system of purchasing shares at regular intervals
with a fixed dollar amount. The number of shares may change with each purchase,
based on the share price at the time of purchase. The fixed dollar amount buys
more shares when the share price is low and fewer shares when the share price is
high. If you are investing regularly in the TSP funds through payroll
deductions, you are already dollar-cost averaging.
How does dollar-cost averaging benefit me?
The example below illustrates how dollar-cost averaging potentially benefits
you.
In the above example, you made regular contributions of $200. Since
there was a different share price each time you made a contribution, you
received a dif- ferent number of shares for each $200 contribution you made.
With your four contributions, you invested a total of $800 and purchased a total
of 24 shares. Your average share price (that is, the sum of the four share
prices divided by the number of contributions, or $150 ÷ 4) was $37.50. However,
because of dollar-cost averaging, your cost per share was only $33.33 -- the sum
of your contributions divided by the number of shares you purchased ($800 ÷
24).
face="arial, helvetica, sans-serif" color=#666666 size=1>OC 03-11 (7/2008)