MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: Dangle a 401(k) plan or similar tax deferred retirement plan in front of most Americans, and they'll jump right in. People know they need to save and invest for the future. But there is one troubling problem. Once participants set their plan up, they rarely make any changes in their investment strategy. On the plus side, this means investors aren’t panicking and selling when stocks are at their lowest. But on the negative side it also means that a portfolio that might have been appropriate when the participant first entered the plan is no longer suitable the closer they get to retirement. Enter Life-Cycle funds. Also known as a target retirement portfolio, the life-cycle fund is a relatively new twist on an old investment standby: the asset allocation fund. But unlike those all-in-one mutual funds, which give you a diversified but unchanging mix of stocks, bonds, and cash, life-cycle funds automatically evolve as you age—at least that’s the theory. The concept is simple. When you're 25, these portfolios might put 80 percent or more of your money in stocks. But as you turn 40 and then 50 and eventually retire, the funds will gradually and automatically dial down the risk in your portfolio by buying more bonds. Life-cycle funds put your portfolio on autopilot for a lifetime: Set it and forget it. Life-cycle retirement funds aren't new—Fidelity's Freedom Funds were launched in 1996—-but they've really begun to take off since 2005. According to the financial research firm Strategic Insight, last year investors plowed nearly $23 billion into target retirement funds, more than 12 times the amount they stuffed into these portfolios in 2000. If life-cycle funds have a familiar ring to you they should; particularly to baby boomer parents who have been saving for their kids' education in popular 529 college savings plans. Almost all 529 plans have age-based investment options using the same concept as target funds. Are life-cycle funds for you? That depends. There is no question that with more and more fund companies bringing out new life-cycle options--MFS and Putnam are among the latest to have joined this crowd, competing with early participants such as Fidelity, Vanguard, and T. Rowe Price—assets in such portfolios are likely to grow substantially. On the downside, many target date funds tend to err on the conservative side, especially at retirement, when today's 60-something might expect to live for another 20 to 25 years. A cookie-cutter approach to retirement planning is always dangerous. Two people who are roughly the same age and who plan to retire at around the same time might have different financial needs and far different tolerances of investment risk, therefore a “one size fits all” investment philosophy won’t necessarily work. But using life-cycle funds may be better than investing entirely on your and deliver better results than do-it-yourselfers achieve. In 2003 and 2004, a Hewitt and Associates study shows, 401(k) investors who used target retirement funds, either as the sole investment option or in conjunction with other investments, outperformed workers who invested entirely on their own. In 2004, the target retirement fund investor's returns were 11.6 percent, while the do-it-yourselfer earned just 9.6 percent. What's more, Hewitt projected that the workers using target retirement funds could expect to earn 8.5 percent a year on average in the long term, while do-it-yourselfers would make 7.4 percent annually. One percentage point might sound like a pittance, but for two 25-year-olds who are investing $5,000 a year in a retirement plan, that difference adds up to $400,000 by age 65—hardly chump change.▲

Rebalancing your portfolio automatically...

Volume 17, Issue 15

July 24, 2006

Life-Cycle Mutual Funds