Lifecycle funds let you do the retirement 'one-step'
Assets have swelled 50 percent in these funds since 2003, as investors lean on fund companies to allocate their money - and balance potential profit against risk.
During this year's choppy market, many mutual-fund investors have decided to stop surfing each wave and opted instead for the Wall Street equivalent of an ocean freighter.Skip to next paragraph
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While their performance isn't exactly sexy, these funds do offer a smoother ride in turbulent markets than the average equity fund. Called lifecycle funds - a moniker that cuts across a range of categories - they meet a growing demand for ready-made diversification and simplicity, especially among investors planning for retirement. They're based on the idea that for long-term investment success, it's more important to apportion your assets than to select stocks or invest at the right time.
"Lifecycle funds are gaining traction with 401(k) plans because they increasingly serve as a default option for younger workers," says Ross Frankenfield, an analyst with Financial Research Corp in Boston. "It's a good way for companies to discharge their fiduciary obligation without exposing workers to excessive risk in their nest eggs."
Lifecycle funds also attract experienced investors who want a "one-step" solution without having to fret about asset allocation issues or periodic rebalancing, according to Ned Notzon, chairman of T. Rowe Price's retirement funds advisory committee. "They make a solid core holding around which you can spin spicier types of stocks or funds."
Those benefits may explain their growing popularity. Assets in lifecycle funds have swelled to some $150 billion, an increase of more than 50 percent since the end of 2003, handily outpacing broad fund industry growth, according to Financial Research Corp. Much of the increase comes from corporate retirement plans whose monthly contributions tend to follow a steady pattern.
Following the private sector's lead, the federal government is about to introduce lifecycle investing to its employees. Beginning next month, some 3.4 million participants in the federal Thrift Savings Program will be able to enroll in a series of funds with target maturities every 10 years beginning in 2010. The funds, managed by Barclays Global Investors, one of the nation's largest index-fund managers, are designed to coax federal employees to be more venturesome in their investment choices.
There are two kinds of lifecycle funds: those that tie their asset allocation formula to a specific date, typically an investor's retirement year, and those that build their asset allocation around a predetermined level of risk. The first variety, known as target-date funds, include T. Rowe Price's Retirement 2020 and American Century's My Retirement 2045 funds. Both gradually tilt their stock/bond mix from mostly equities in the early years toward fixed-income investments as the target date nears.
Conversely, managers of target-risk funds, such as MFS Growth Allocation Fund and American Century One Choice Portfolio: Moderate, preserve the same level of risk by periodically tweaking the asset mix. They shift money from areas of the market that look pricey to those that look cheap.
That's hardly new. The very first mutual funds - called balanced funds - used a similar strategy. But unlike balanced funds, which employ a one-size-fits-all approach, lifecycle funds often come in multiple flavors: conservative, moderate, and aggressive portfolios. That way investors can choose their risk tolerance and recalibrate over time, switching from one portfolio to another within the same fund family.