The TSP is a daily valued plan which means the value of your account is determined each business day based on the daily share price and the number of shares you hold in each fund.
At the end of each business day, after the stock and bond markets have closed, the total value of the funds' holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day.
Under the Internal Revenue Code, earnings in the TSP and other similar defined contributions plans (e.g., 401(k) plans) are not taxable income, nor is the tax treatment different for interest, dividends, capital gains, or tax-deferred contributions when money is withdrawn from the plan. Therefore, there is no need to report dividends and capital gains separately for tax-deferred accounts.
BlackRock Institutional Trust Company, N.A, which manages the index funds in which the F, C, S, and I Funds are invested, credits interest and dividend income each business day. This income is then reflected in the TSP share prices.
The daily change in TSP share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses.
Contributions from all sources (employee contributions, Agency Automatic (1%) Contributions, and Agency Matching Contributions), as well as loan payments and transfers from other eligible retirement plans, are used to purchase shares in each TSP investment fund based on your contribution allocation.
For example, if your employee contribution each pay period is $100 and you have elected to invest in one TSP fund, $100 will be used to purchase shares in that fund. The calculation is done the same way if you are eligible for Agency Automatic (1%) Contributions and Agency Matching Contributions.
The number of shares purchased by each contribution source is calculated by dividing the contribution ($100 in the above example) by the applicable share price. The number of shares purchased is then rounded to four decimal places.
When you borrow or withdraw from your TSP account, the shares are sold from your account at the applicable share price. The number of shares sold is calculated by dividing the amount required from each fund/source combination by the share price for that fund. The result is rounded to four decimal places.
On some days, the percentage change in the I Fund share price reported by the TSP can be significantly different from the percentage change reported for the MSCI EAFE (Europe, Australasia, Far East) Index, which the I Fund tracks. These differences usually occur when the investment manager finds it necessary to reprice its EAFE Equity Index Fund, in which the TSP invests, to reflect changes occurring after the close of the foreign markets.
This process, known as "fair valuation" or "fair value pricing", occurs when there are U.S. market or currency movements between the time the foreign markets close and 4:00 p.m., Eastern time, when the EAFE Equity Index Fund share prices are determined.
For example, the Far East markets close at 3:00 a.m., Eastern time. If there is a major event afterwards — whether a natural disaster or even a major U.S. market swing that affects the pricing of the stocks in the EAFE Equity Index Fund — without fair value pricing, that event's impact on share pricing would be ignored. That is, the price information from the foreign markets can become "stale", or out of date, by the close of the U.S. markets at 4:00 p.m., Eastern time — a full 13 hours later. On such a day, absent fair value pricing, market timers could buy the I Fund and sell their holdings on the following day in order to benefit from the "stale" pricing. They would accomplish this transaction at the expense of other investors in the fund.
Fair value pricing ensures that traders do not benefit from trading on stale prices. It prevents traders from using events that may have occurred between the close of the foreign market and the close of the U.S. market, which may have affected EAFE Index Fund prices, to achieve an unfair trading and profit advantage at the expense of long-term shareholders.