Broker Check

Lifecycle Funds Coming Under Scrutiny

Like most other investments, lifecycle funds couldn’t escape the market downturn of 2008. These self-adjusting asset allocation funds, which dial down risk as shareholders approach retirement, still had sufficient equity holdings in their most conservative versions to be hit hard when stocks lost half their value. The funds’ performance left many near-retirees in a deep hole, and it has resulted in scrutiny by Congress, the U.S. Department of Labor, and the Securities and Exchange Commission. Changes may be coming, particularly in the rules that let company retirement plans use lifecycle funds as a default investment option.

Lifecycle funds, also known as target-date funds, are designed for investors who want a diversified portfolio appropriate for their stage in life. It’s an appealing idea to invest in a fund that takes care of everything, adjusting allocations as you age while also regularly rebalancing holdings to stay in line with target weightings. Introduced in the 1990s, lifecycle funds received a major boost a few years ago when they were designated as “qualified default investment alternatives” (QDIAs) for 401(k) plans that automatically enroll employees unless they opt not to participate. When a plan participant hasn’t indicated how to invest his savings, the money can be funneled automatically into a lifecycle fund as a QDIA.

But many investors in lifecycle funds were shocked at the magnitude of their losses in the market meltdown, and regulators at the DOL and the SEC recently convened a joint hearing on proposed reforms. Possible improvements include enhanced disclosure, uniform naming policies to reduce investor confusion, and stricter standards for fiduciaries of plans that use lifecycle funds. Other measures to increase investor education about the funds and their uses are also on the table. And some experts have called for substantial changes in the funds, from capping their stock market exposure near retirement to incorporating absolute-return strategies that might reduce volatility during market plunges.

Whatever reforms happen, it will be up to investors to understand the pros and cons of these special investments and to consider their possible role in a retirement plan. If you would like help reexamining your retirement portfolio, please give us a call.

There are certain risks and considerations to take into account prior to investing in a target-date fund. A target-date fund—also known as a lifecycle or age-based fund—is a fund portfolio that helps investors saving for retirement choose a single portfolio aligned with the year closest to their expected retirement. It is designed to provide an asset mix that becomes more conservative as the date for expected withdrawals to begin approaches. Consider in addition to your age or date of retirement other factors, including your risk tolerance, personal circumstances, and complete financial situation. A target-date fund is not guaranteed and it is possible to lose money by investing in the fund, even after the target date has passed. Certain funds’ asset allocations may be subject to change and the extent to which the allocations of a target-date fund among types of investments may be modified without shareholder vote.


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