Lifecycle Funds

A whole new batch of mutual funds have come on the scene over the last few years and they are rapidly gaining prominence in employer-sponsored retirement plans.
These “lifecycle” mutual funds — which also go by names like “targeted funds” or “age-based” funds — promise to solve the issue of asset allocation in one fell swoop.
Well, lifecycle funds are “fund of funds.” In other words, you buy one fund, but really own multiple mutual funds under that single banner.
So you simply decide when you plan on retiring, and let the lifecycle fund do the rest.
The fund’s manager will automatically determine what kind of asset allocation is appropriate for you and then spread your money into other funds that cover those areas.
Example: A 33-year-old investor might buy a lifecycle fund with a 2040 target date. And right now, that fund might put 70% into a couple of different stock mutual funds and the other 30% into some bond mutual funds.
Then, as the years go by, the manager will gradually make the portfolio more conservative, by shifting money from the stock funds into the bond funds.
So by the time 2040 rolls around, the lifecycle fund will be primarily invested in bond funds and our now-60-year-old investor is ready to enjoy retirement.
But as I pointed out, there’s no way to lump an entire generation — or even two people of similar age — into one single asset allocation!
Moreover, even lifecycle funds with similar target dates can vary wildly in terms of their holdings.
Some managers are very conservative, even for far-off dates. Others might go hog wild on stocks.
There’s really no way to know without doing some due diligence.
And at that point, you might as well just assemble a list of funds or individual investments that suit your needs!
By the way, perhaps the biggest design feature of lifecycle funds is that they lead to nice fees and commissions for the companies that run them.
In fact, the beauty of this approach — from a fund company’s perspective — is that it virtually guarantees all of your assets stay “in house.”
It doesn’t matter if the fees are high or the individual fund performances are poor. The concept encourages you to mindlessly pour your money into the same firm … and keep it there as long as you live!
Am I saying all lifecycle funds are bad? Of course not.
You can find low-fee choices that might work well for you, especially if you don’t like picking individual investments or worrying about monitoring your asset allocation.
And I’d much rather see someone invest in an imperfect vehicle than not plan for retirement at all!
But in my opinion, you can do much better on your own. All it takes is a little self-examination using the big-picture questions I’ve already raised.
And even if you just tweak the basic rule of thumb method and use low-cost index funds, you’ll save yourself a lot of wasted money on mutual fund fees.