Lifecycle funds let you do the retirement 'one-step'

Most lifecycle funds have a "fund of funds" structure that often holds about six to 12 offerings from the same fund family. Each portfolio represents a broad range of asset classes and investment styles linked to its long-term investment objective. MFS Investments, for example, has four asset-allocation funds that invest in as many as 11 underlying MFS funds including small cap, mid-cap growth, large-cap value, and international offerings. Each fund has a distinct risk/reward profile that is periodically rebalanced to assure that no one or two investment styles or asset classes predominate. Less than three years old, the four funds sport average annual returns of 5 to 9 percent - and have already garnered more than $4 billion in assets.

The fund-of-funds approach, while a strength in many ways, can also be a weakness, critics point out, because they rely on the offerings of a single fund family. So a lifecycle fund could diversify by buying a mutual fund that's sub-par. But lifecycle advocates argue that the advantages of disciplined allocation outweigh the disadvantages of any one fund.

"Our focus is always on assuring the right top-level mix between various equity styles and bond maturities," says Joseph Flaherty Jr., senior vice president with MFS. That approach takes most of the emotion out of decisionmaking, he adds. Unlike most investors, who hate to shed winning stocks, "automatic rebalancing forces us to recycle money from top performers to out-of-favor groups."

While target-date funds become more conservative as an investor matures, not all march to the same beat. T. Rowe Price's eight retirement funds, for example, reach their most conservative allocation 30 years past the expected retirement year, when stocks drop from 55 percent to 20 percent of the total portfolio. Fidelity's Freedom retirement funds, on the other hand, downshift to a 20 percent stock allocation within a few years after retirement.

Most investors trim their equity exposure too much during post-retirement years, says Mr. Notzon. "If you expect to keep pace with the rise in the cost of living and increased longevity, you should keep at least half of your portfolio in equities during the initial retirement years."

In selecting a lifecycle fund, investors should compare offerings from several families, analysts say. Many of these funds are too new to have a five-year track record, but a one- or three-year record can be revealing. A family with a superior record in stock-picking might not match that skill in bonds, or vice versa. Funds with a similar risk target can vary significantly in their asset-allocation formulas. Some might be too cautious to reach their long-term investment goals. Others may have high expense ratios, detracting from future returns. Management fees and expenses are generally higher for lifecycle than for balanced funds, which average 1.3 percent, according to fund tracker Morningstar. While fund-of-fund managers justify their higher fees by the extra layer of management oversight required, some fund families such as Vanguard and T. Rowe Price don't tack on any extra fees.

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