Thrift Savings Plan (TSP) - S Fund: A Comprehensive Guide
- tress14plaid
- Apr 6
- 15 min read
The S Fund provides TSP investors with exposure to small and mid-sized U.S. companies not included in the S&P 500 index. By tracking the Dow Jones U.S. Completion Total Stock Market Index, this fund offers access to a broad segment of the American economy with historically strong growth potential, though with increased volatility compared to large-cap investments, creating an important diversification component for long-term retirement portfolios.
Table of Contents
Introduction to the Thrift Savings Plan
The Thrift Savings Plan (TSP) serves as the primary retirement savings vehicle for federal employees, uniformed service members, and veterans. Established by the Federal Employees' Retirement System Act of 1986 (5 U.S.C. § 8401-8479), the TSP functions as a defined contribution plan that offers tax advantages, agency matching contributions, and diversified investment options (TSP.gov).
The Federal Retirement Thrift Investment Board (FRTIB), an independent federal agency, administers the TSP. According to the FRTIB's official statistics, the TSP manages over $700 billion in assets for more than 6 million participants, making it one of the largest retirement plans in the world (FRTIB.gov).
Within this framework, the Small Capitalization Stock Index Investment (S) Fund has distinct characteristics that differentiate it from other investment options available to TSP participants.
S Fund at a Glance: Key Points Table
Feature | S Fund Characteristics | Why It Matters |
Risk Level | Higher - Principal can fluctuate substantially | Greater volatility brings potential for significant gains and losses |
Return Profile | Typically 8-10% annually (varies with market conditions) | Higher long-term return potential than G, F, and potentially C Funds |
Unique Advantage | Exposure to small and mid-sized U.S. companies | Access to growth potential of emerging corporate leaders |
Government Backing | None - Market-driven returns | Performance tied to success of smaller U.S. businesses |
Primary Strength | Long-term capital appreciation potential | Growth component for building retirement wealth |
Main Limitation | Higher stock market volatility | Can experience significant declines during market downturns |
Market Coverage | Complete U.S. stock market when paired with C Fund | Complements C Fund to provide total U.S. market exposure |
Liquidity | Complete - no restrictions on transfers within TSP | Easily repositioned as needs change |
Tax Treatment | • Traditional TSP: Tax-deferred growth<br>• Roth TSP: Tax-free growth (qualified) | Different tax implications based on account type |
Historical Performance | Average annual return ~8.8% since inception | Higher potential returns with increased volatility |
The S Fund: Fundamentals and Structure
The S Fund represents a diversified equity investment vehicle that exists within the Thrift Savings Plan ecosystem. It provides federal employees access to the small and mid-sized segment of the U.S. stock market through an index-based approach.
Origin and Purpose
The S Fund was introduced to the TSP investment lineup in May 2001, more than a decade after the initial core offerings of the G, F, and C Funds. It was designed to provide participants with access to the growth potential of smaller U.S. companies not included in the S&P 500 Index (TSP.gov).
Unique Investment Structure
What distinguishes the S Fund is its investment composition. Unlike the C Fund's focus on large U.S. companies, the S Fund provides:
Index Tracking: The fund follows the Dow Jones U.S. Completion Total Stock Market Index, which represents all U.S. publicly traded companies not included in the S&P 500
Small and Mid-Cap Focus: Represents thousands of smaller companies with potential for higher growth
Complementary Coverage: When combined with the C Fund, provides exposure to virtually the entire U.S. stock market
According to the TSP's official fund information, the S Fund holds the stocks of most of the companies in the index with market values greater than $1 billion, with mathematical sampling techniques used to select among the smaller stocks (TSP.gov).
Legal Framework and Governance
The S Fund operates within a comprehensive legal framework that provides significant protections for TSP participants.
Statutory Foundation
The S Fund's legal foundation rests in Title 5 of the United States Code, specifically 5 U.S.C. § 8438(b)(1)(D), which authorizes the FRTIB to establish a small capitalization stock index investment fund that:
Offers a portfolio designed to replicate the performance of a commonly recognized index
Consists of common stocks of companies not included in the S&P 500 index
Maintains appropriate diversification within the U.S. equity market
Fiduciary Oversight
The Federal Retirement Thrift Investment Board oversees the S Fund with fiduciary responsibility, guided by 5 C.F.R. Part 1600-1690. An independent accounting firm audits the S Fund annually, with results published in the TSP's financial statements.
Investment Management Structure
The S Fund is managed through:
External investment managers contracted by the FRTIB
A passive indexing approach that minimizes management costs
Regular adjustment processes that maintain alignment with the underlying index
The FRTIB's Executive Director currently allocates the selection, purchase, investment, and management of assets contained in the S Fund to BlackRock Institutional Trust Company, N.A., and State Street Global Advisors Trust Company (TSP.gov).
Mechanics of the S Fund
Understanding how the S Fund operates helps explain its unique position among TSP investment options.
Index Tracking Methodology
The S Fund employs a representative sampling approach to track its underlying Dow Jones U.S. Completion Total Stock Market Index:
The fund holds stocks of most companies in the index with market values greater than $1 billion
Mathematical sampling techniques select from among the smaller stocks
A portion of fund assets is reserved as a liquidity reserve invested in futures contracts of the S&P 400 and Russell 2000 indices
This approach ensures that the S Fund's performance closely mirrors that of the broader small and mid-cap U.S. equity market without the need to hold all 3,000+ securities in the index (TSP.gov).
Index Composition Characteristics
The Dow Jones U.S. Completion Total Stock Market Index includes:
Approximately 3,300 publicly traded companies
All U.S. publicly traded stocks not included in the S&P 500
Small and mid-sized companies across various sectors
Approximately 18% of the total U.S. stock market value (with the S&P 500 representing the other 82%)
This composition creates a fund that complements the C Fund to provide exposure to virtually the entire U.S. stock market.
Price Determination Factors
Like the C Fund, the S Fund's share price fluctuates daily based on multiple factors:
Corporate earnings and growth expectations
Economic indicators and outlook
Market sentiment and liquidity
Industry and sector trends
Changes in the underlying companies' values
These factors contribute to the S Fund's higher volatility compared to larger-cap investments.
Strategic Advantages of the S Fund
The S Fund offers several distinct characteristics that differentiate it from other TSP investment options.
Growth Potential
Modern Portfolio Theory, developed by economist Harry Markowitz, identifies small-cap equities as a potentially higher-return asset class. The S Fund provides:
Exposure to companies in earlier growth stages
Participation in businesses with higher growth potential
Access to market segments with historically higher long-term returns
According to financial research published in the Journal of Finance, small-cap stocks have historically outperformed large-cap stocks over extended time periods, though with greater short-term volatility (Journal of Finance).
Diversification Benefits
The S Fund provides important diversification advantages when combined with other TSP options:
Expanded Market Coverage: When paired with the C Fund, provides total U.S. stock market exposure
Size Diversification: Access to smaller companies with different growth characteristics
Economic Exposure: Diversification across different market capitalization segments
Research from financial institutions such as Vanguard indicates that portfolios including both large and small-cap stocks have historically provided more robust risk-adjusted returns over long time periods (Vanguard.com).
Completion Portfolio Concept
The S Fund serves an important role as a "completion" portfolio:
Fills the gap between the C Fund and total U.S. market exposure
Provides access to market segments not represented in the S&P 500
Creates a more comprehensive domestic equity allocation
According to Modern Portfolio Theory principles, more complete market coverage can enhance long-term portfolio efficiency (Journal of Finance).
Characteristic | Description | Comparison to Similar Investments |
Market Coverage | Represents ~18% of U.S. equity market value | More focused on growth segments than broad market funds |
Risk Profile | Higher volatility with growth potential | More volatile than large-cap, less than specialized sectors |
Return Potential | Long-term capital appreciation with moderate dividend income | Historically higher returns than large-cap with more volatility |
Liquidity | No restrictions on withdrawals or transfers within TSP | Comparable to other TSP funds |
Diversification | Exposure to thousands of small and mid-sized U.S. companies | Broader small-cap exposure than many specialized funds |
Limitations and Considerations
While the S Fund offers potential advantages, it also presents certain limitations that participants should consider when constructing retirement portfolios.
Heightened Market Risk
A significant consideration associated with the S Fund is its elevated market risk profile:
Small and mid-sized companies typically experience greater price volatility
Historical drawdowns have exceeded those of the C Fund
The S Fund's worst historical drawdown was approximately -57.4%
This higher volatility means that the S Fund may experience larger and more frequent negative returns compared to the C Fund, particularly during broad market corrections.
Company-Specific Risk Factors
Smaller companies represented in the S Fund face distinct challenges:
Limited resources and financial flexibility compared to larger corporations
Greater sensitivity to economic downturns and credit conditions
Less established market positions and competitive advantages
Lower trading liquidity in some component stocks
While index diversification reduces individual company risk, these general characteristics create a different risk profile than large-cap investments.
Cyclical Performance Patterns
The S Fund has demonstrated cyclical performance patterns relative to other equity options:
Small-cap stocks often outperform in the early stages of economic recoveries
Large-caps may outperform during economic uncertainty or late-cycle periods
Performance leadership between small and large-caps can persist for extended periods
These cyclical patterns create periods of both outperformance and underperformance relative to the C Fund.
Potential Concentration Issues
While diversified across thousands of companies, the S Fund may face concentration considerations:
Sector weightings differ from the C Fund, with potentially greater exposure to certain industries
Performance may be influenced by factors affecting smaller companies broadly
Index methodology changes can affect constituent selection and weighting
These characteristics mean the S Fund's performance patterns will differ from those of other TSP options.
S Fund in Portfolio Planning
The S Fund can serve different functions within a portfolio depending on individual circumstances, financial goals, and time horizon.
Considerations by Career Stage
Financial planning literature suggests that individuals typically adjust their investment allocations throughout their career lifecycle:
Early Career
Research from financial institutions such as Vanguard indicates that individuals with longer time horizons often benefit from:
Higher equity allocations, potentially including substantial S Fund exposure
The ability to withstand short-term volatility through a longer investment horizon
Dollar-cost averaging through regular contributions during market fluctuations
Mid-Career
As individuals progress through their careers, portfolio preservation typically becomes increasingly important alongside continued growth:
S Fund allocations may remain significant but are often balanced with more stable options
Diversification across multiple TSP funds takes on increased importance
Strategic rebalancing helps maintain desired risk levels
According to a study published in the Journal of Financial Planning, balanced approaches that include both large and small-cap exposure have historically provided more consistent outcomes (Journal of Financial Planning).
Near Retirement
As retirement approaches, many financial professionals observe that protecting accumulated assets often becomes a higher priority:
S Fund allocations may be reduced to limit sequence-of-returns risk
Greater emphasis on income-generating and stable-value investments
Increased focus on capital preservation versus additional growth
The TSP's L Fund glide paths reflect this general principle by systematically reducing equity exposure as target retirement dates approach.
Retirement Phase
During retirement, TSP participants often increase stable asset allocations while maintaining some growth orientation:
S Fund holdings may be reduced but often maintained as an inflation hedge
Balanced allocations help protect against inflation over extended retirement periods
Strategic withdrawals may be coordinated with market conditions
According to research from the Federal Retirement Thrift Investment Board, having access to diversified investment options provides valuable flexibility during the distribution phase of retirement (FRTIB.gov).
Portfolio Adjustment Approaches
Financial planning literature discusses several approaches to maintaining desired asset allocations:
Calendar Approach
Setting specific dates to review portfolio allocations provides a structured approach. Research published in the Journal of Financial Planning suggests annual reviews can help maintain target allocations (Journal of Financial Planning).
Threshold Approach
Establishing percentage thresholds that trigger review when exceeded can help maintain allocations while reducing unnecessary adjustments during minor market fluctuations.
Market Volatility Considerations
The S Fund can experience significant short-term volatility:
During periods of market stress, emotional decision-making can impact investment outcomes
Research indicates that remaining invested through market cycles typically produces better results than market timing attempts
Rebalancing during extreme market movements may help maintain risk-appropriate exposures
According to a Morningstar study, investors who miss just the 10 best trading days over a 20-year period typically experience significantly different returns (Morningstar.com).
Comparative Analysis with Other TSP Funds
Understanding how the S Fund relates to other TSP investment options provides context for portfolio construction.
TSP Fund | Type | Risk Profile | Return Potential | Primary Function | Correlation with S Fund |
G Fund | Special U.S. Treasury Securities | Lower | Moderate | Capital preservation, stability | Low negative |
F Fund | Fixed Income (Bloomberg U.S. Aggregate Bond Index) | Low to Moderate | Moderate | Diversification, income generation | Low negative |
C Fund | Large-Cap Stocks (S&P 500 Index) | Higher | Higher | Long-term growth, market exposure | High positive |
S Fund | Small/Mid-Cap Stocks (Dow Jones U.S. Completion Total Stock Market Index) | Higher | Higher | Growth, diversification | — |
I Fund | International Stocks (MSCI EAFE Index) | Higher | Higher | Global diversification | Moderate positive |
S Fund vs. Fixed Income Options
The relationship between the S Fund and the G and F Funds represents different risk-return profiles:
The G and F Funds provide stability and income with lower volatility
The S Fund offers higher growth potential with increased price fluctuations
These differences create opportunities for diversification and risk management
According to Modern Portfolio Theory principles, combining assets with different correlation patterns can affect overall portfolio risk-adjusted returns (Journal of Finance).
S Fund vs. Other Equity Funds
The S Fund, C Fund, and I Fund provide different equity market exposures:
The C Fund focuses on large and medium-sized U.S. companies
The S Fund covers smaller U.S. companies not in the S&P 500
The I Fund provides international developed market exposure
Together, these three funds offer comprehensive global equity market coverage, reducing concentration in any single market segment.
S Fund and C Fund Relationship
The relationship between the S Fund and C Fund is particularly important:
Together they provide exposure to virtually the entire U.S. stock market
Their relative market sizes are approximately 18% (S Fund) and 82% (C Fund)
A 4:1 ratio of C Fund to S Fund approximates the total U.S. market weighting
According to the Bogleheads investment community, this combined approach creates a comprehensive domestic equity allocation (Bogleheads.org).
Lifecycle (L) Funds: Professional Asset Allocation
For participants seeking professional management of allocation decisions, the TSP's L Funds provide target-date portfolios that automatically adjust the balance between the S Fund and other options based on projected retirement dates:
Later-dated L Funds (L 2055, L 2060, L 2065) maintain higher S Fund allocations
Earlier-dated L Funds (L 2025, L 2030) reduce S Fund exposure as retirement approaches
The L Income Fund, designed for current retirees, maintains a more conservative allocation
According to the Federal Retirement Thrift Investment Board, these professionally managed allocations are designed to provide age-appropriate risk levels throughout a participant's career and retirement (TSP.gov).
Historical Performance Analysis
Examining the S Fund's historical performance provides context for understanding its characteristics.
Historical Returns
According to comprehensive TSP records dating back to the fund's 2001 inception, the S Fund has delivered the following performance metrics:
Average Annual Return (2001-Present): Approximately 8.8%
Best Calendar Year: 38.3% (2003)
Worst Calendar Year: -38.3% (2008)
Standard Deviation: Approximately 22%
This performance reflects various economic cycles and market conditions, demonstrating the S Fund's potential for both significant gains and substantial losses.
Performance Through Market Cycles
The S Fund's behavior during major market events illustrates its risk-return profile:
2000-2002 Dot-Com Decline
The S Fund was introduced near the later stages of this bear market
Small and mid-cap stocks experienced significant volatility during this period
The S Fund began to outperform as the recovery started in 2003
2008-2009 Financial Crisis
The S Fund dropped approximately 38.3% in 2008
Small-caps initially lagged large-caps in the recovery
Eventually posted strong returns in the subsequent bull market
2020 Pandemic Decline
The S Fund fell sharply during February-March 2020
Subsequent recovery was robust with significant outperformance
Demonstrated the volatile nature of small-cap investments
Relative Performance with C Fund
The relationship between the S Fund and C Fund performance shows interesting patterns:
Performance leadership has alternated over different market periods
Small-caps often outperform in early economic recovery phases
Large-caps sometimes lead during periods of economic uncertainty
Over very long time horizons, performance has been surprisingly similar
According to market researchers, these alternating periods of outperformance support the case for holding both funds in a diversified portfolio.
Real Returns After Inflation
While nominal returns provide important information, real returns (after adjusting for inflation) reflect purchasing power outcomes. According to Bureau of Labor Statistics data on Consumer Price Index changes (BLS.gov):
During periods of moderate inflation, the S Fund has typically delivered strong positive real returns
During periods of higher inflation, real returns have sometimes compressed
Overall average real return since inception: Approximately 6-7% annually
Tax Implications
The tax treatment of S Fund earnings varies based on which TSP account type holds the investment.
Traditional TSP Accounts
Within Traditional TSP accounts, S Fund earnings receive the following tax treatment:
Contributions and all earnings grow tax-deferred under 26 U.S.C. § 402(g)
All withdrawals, including S Fund principal and earnings, are taxed as ordinary income
Required Minimum Distributions (RMDs) beginning at age 72 apply to Traditional TSP balances
Roth TSP Accounts
Within Roth TSP accounts, S Fund earnings receive substantially different treatment:
Contributions are made with after-tax dollars
All qualified earnings, including S Fund capital gains and dividends, become completely tax-free under 26 U.S.C. § 402A
No RMDs apply to Roth TSP balances when transferred to Roth IRAs
Tax Planning Considerations
The tax treatment differences between Traditional and Roth accounts create several planning considerations:
Tax Location Options: Participants may consider which funds to hold in which account types based on their tax situation
Tax Diversification: Maintaining both Traditional and Roth balances creates flexibility to manage taxable income in retirement
Conversion Considerations: During years with unusually low income, Traditional to Roth conversions may be considered
According to IRS Publication 571, these tax planning options remain available to federal employees throughout their careers and into retirement (IRS.gov).
S Fund in Retirement: Distribution Options
The S Fund's growth characteristics make it a component to consider during the distribution phase of retirement when balancing income needs with continued growth potential.
Distribution Strategy Options
Research on withdrawal strategies suggests that portfolios maintaining some equity exposure can support retirement spending through various market conditions:
The classic 4% withdrawal rule initially developed by financial planner William Bengen examined portfolios that included significant equity allocations
According to studies published in the Journal of Financial Planning, maintaining equity exposure during retirement has historically affected withdrawal sustainability (Journal of Financial Planning)
TSP participants can implement structured approaches to retirement distributions:
Percentage Method
Withdrawing a percentage of the total balance annually provides inflation adjustment but creates variable income.
Dollar-Plus-Inflation Method
Beginning with a specific dollar amount and adjusting annually for inflation aims to provide stable purchasing power.
Bucket Approach
Many retirement planning specialists discuss "income buckets" with different time horizons:
Immediate needs: Stable assets such as the G Fund
Medium-term needs: Mixed assets including the F Fund
Long-term needs: Growth assets such as the C, S, and I Funds
TSP-Specific Withdrawal Options
The TSP offers several withdrawal mechanisms that can incorporate the S Fund's characteristics:
Monthly Payments: Fixed or calculated amounts withdrawn regularly
Partial Withdrawals: Lump-sum amounts taken periodically
Life Annuity: Converting TSP balances to guaranteed lifetime income
Installment Payments: Regular withdrawals of specific amounts
Under the TSP Modernization Act of 2017, participants gained substantially more flexibility in combining these options and making changes throughout retirement (TSP.gov).
Frequently Asked Questions
Is the S Fund appropriate for those early in their federal careers?
The S Fund's higher growth potential and longer-term focus make it particularly suitable for younger employees with extended time horizons. Research from Vanguard suggests that portfolios with significant equity exposure can have higher risk-adjusted return profiles over long periods (Vanguard.com).
How does the S Fund compare to simply investing in the C Fund?
The S Fund provides exposure to a completely different segment of the U.S. market than the C Fund:
The C Fund holds large and mid-sized companies in the S&P 500
The S Fund holds smaller companies not included in the S&P 500
Together they provide comprehensive U.S. market coverage
Historical performance patterns differ, creating diversification benefits
What is the appropriate balance between the C and S Funds?
To approximate the total U.S. stock market weighting, a ratio of approximately 4:1 (C Fund to S Fund) reflects their relative market capitalizations. However, individual allocations should consider:
Personal risk tolerance and time horizon
Existing portfolio composition
Strategic views on market segments
Disciplined rebalancing approach
Should S Fund allocations be reduced near retirement?
Financial planning literature generally suggests reducing exposure to more volatile investments as retirement approaches. However, the appropriate reduction depends on:
Overall portfolio composition
Retirement income needs and sources
Legacy goals and time horizon
Risk tolerance and financial situation
As with all investment decisions, individual circumstances should guide specific allocation decisions.
Conclusion
The S Fund represents an important component of the federal retirement system, offering participants access to the growth potential of America's small and mid-sized companies. Its index-based structure creates a reliable option for TSP portfolios across different market environments.
While the S Fund introduces greater market risk than the G and F Funds, it serves as an essential component of diversified portfolios that aim to build long-term wealth. The G, F, C, and I Funds provide different risk-return profiles that can complement the S Fund's small and mid-cap U.S. equity characteristics.
As market environments evolve and economic conditions change, the S Fund's relative characteristics will fluctuate. However, its fundamental structure—providing broad exposure to the small and mid-cap segment of the U.S. equity market through a low-cost index approach—remains constant through economic cycles.
Understanding both the attributes and limitations of this important investment option can help TSP participants make informed decisions aligned with their individual circumstances, time horizon, and financial goals.
The information provided in this article is for general informational and educational purposes only and should not be construed as financial, tax, or legal advice. This article does not constitute an offer, recommendation, or solicitation to buy or sell any securities or investment products.
Past performance is not indicative of future results. Investment involves risk, including the possible loss of principal. The S Fund, while offering growth potential, carries market risk that may impact the value of your investment over time.
Individual circumstances vary widely, and appropriate investment allocations depend on your specific financial situation, risk tolerance, time horizon, and retirement goals. Consider consulting with a qualified financial advisor, tax professional, or legal counsel regarding your specific circumstances before making investment decisions.
The examples, percentages, and allocation information provided are for educational illustration and not recommendations for any specific individual. Tax laws and regulations are subject to change, which may affect the tax treatment of your TSP investments.
This article contains references to websites and publications maintained by third parties over whom we have no control. We do not endorse, recommend, or guarantee the products, services, or information provided by these third parties.
Federal employees should refer to official Thrift Savings Plan publications and resources at www.tsp.gov for the most accurate and up-to-date information regarding the TSP program.
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