The Future of the G Fund: Should Federal Employees Stay or Move Their Money?

The G Fund has long been the Thrift Savings Plan’s (TSP) safest investment option, offering federal employees stability, no risk to principal, and returns tied to special-issue U.S. Treasury securities. But as economic policies shift and the government looks for ways to cut costs, federal employees are asking an important question: Will the government reduce the G Fund’s payouts?

Why the Government Has an Incentive to Pay You Less

The G Fund is essentially a cheap borrowing tool for the government. Unlike regular Treasury securities, the special-issue bonds used for the G Fund aren’t directly subject to market fluctuations. However, its interest rate is determined by a statutory formula based on the weighted average yield of all U.S. Treasury securities with 4 or more years to maturity. While insulated from short-term volatility, it indirectly reflects broader market conditions through this formula.

With debt levels rising and pressure to reduce federal spending, some may speculate that one way to cut costs could be to adjust how the G Fund rate is determined. However, any such change would require legislative action, and no proposals have been introduced to alter the current calculation method. This could be framed as a move toward “fairness,” arguing that feds shouldn’t get higher guaranteed returns than the private sector.

It wouldn’t be the first time the G Fund was impacted. During past debt ceiling standoffs, the Treasury delayed reinvestments in the G Fund to free up cash. However, these delays are temporary and do not affect participants’ returns or principal, as the Treasury is legally required to restore any lost interest once the standoff ends. Speculatively, if policymakers sought cost-cutting measures within the TSP, they might consider adjusting how G Fund rates are calculated. However, no formal proposals currently exist to support such a change.

How the G Fund Compares to Public Alternatives

Looking at historical returns, the G Fund has closely mirrored 10-year Treasury yields over the past decade. While it has provided stable returns, it hasn’t outperformed other safe investment options available to the general public.

Year	G Fund Return (%)	10-Year Treasury Yield (%)
2015	2.04	2.14
2016	1.82	1.84
2017	2.33	2.33
2018	2.91	2.91
2019	2.24	2.14
2020	0.97	0.89
2021	1.38	1.52
2022	3.77	3.88
2023	4.02	3.97
2024	4.40	4.27

data sourced from TSP.gov for G Fund returns and the U.S. Department of the Treasury for 10-Year Treasury yields.

If changes were ever proposed to the G Fund’s interest rate calculation, it could impact its attractiveness as an ultra-safe investment. However, there is currently no indication of such legislative or policy shifts. However, any such modification would require legislative action or significant policy shifts, neither of which have been indicated in current discussions.

Why Not Just Buy 10-Year Treasuries Instead?

Some federal employees might wonder: Why not just invest in 10-year Treasury bonds instead of keeping money in the G Fund? Here’s how they compare:

Liquidity & Flexibility

• G Fund: No maturity date, money can be moved in and out daily without penalty.
• 10-Year Treasuries: Locked for 10 years unless sold early, which could result in losses if rates rise.

Interest Rate Risk

• G Fund: Doesn’t lose value if rates rise, since it continuously reinvests at new rates.
• 10-Year Treasuries: If rates rise, their market value drops, creating potential losses if sold early.

Rolling Yield Advantage

• G Fund: Automatically reinvests at current rates, adjusting over time.
• 10-Year Treasuries: Fixed rate for 10 years, which can be a disadvantage if rates increase later.

Simplicity & Fees

G Fund: Zero management required, no commissions, no spreads.

10-Year Treasuries: Bid-ask spreads, transaction fees, reinvestment decisions.

What to Watch For: Red Flags of an Impending Change

• Mentions of TSP reform or “retirement system modernization” in policy discussions. While plausible, there is currently no evidence in policy discussions indicating imminent changes to the G Fund’s structure or payout formula.
• Political rhetoric about “cutting excessive federal benefits” or “ensuring fairness” between public and private-sector workers.
• Changes to the G Fund interest calculation formula, though purely hypothetical at this point, would be something to monitor if any policy discussions emerge on this topic.

Best Alternatives If the G Fund Rate Drops

If the G Fund’s returns decline, federal employees could consider:

• Short-Term Treasuries & CD Ladders – Can provide similar or better rates, depending on interest rate movements.
• Stable Value Funds in IRAs or 401(k)s – Often provide higher risk-adjusted returns with similar safety. (note though while stable value funds can offer competitive returns, they typically carry some credit risk and are not directly comparable to the G Fund’s unique guarantee of principal and interest backed by the U.S. government)
• High-Yield Money Market Accounts – FDIC-insured accounts currently offering competitive rates with full liquidity.

Bottom Line: Should Federal Employees Move Their Money?

For now, the G Fund remains a strong option for those seeking safety and stability. However, if the government moves to reduce payouts, federal employees will need to reassess whether keeping their money in the G Fund is the best choice. Watching for signs of policy changes and understanding alternative options will be critical in navigating potential shifts in the TSP landscape.