A lifecycle fund with a target date of 2035 might start with 90% of its investments in stock-based mutual funds, for example, gradually shifting most of that to bonds, cash and other more conservative investments by the time it stops transforming in 2035.
The concept has caught on with retirement investors who want no-worry funds.
Vanguard, the huge mutual fund company, reported that the number of employer-sponsored retirement accounts that offered target date funds in the Vanguard system doubled between 2005 and 2007. The growth was aided in part by the Pension Protection Act of 2006, which gave employers the option of automatically enrolling workers in their 401(k)s. Of those that chose that option, 80% used target date funds as their default investment, according to Vanguard's 2008 report "How America Saves."
Ups, Downs of Lifecycle Funds
Lifecycle funds offer significant charms for investors who don't want the hassle of managing investments on their own:
- Rebalancing: Most rebalance themselves every year or so, taking the burden of doing that off the investor's shoulders.
- Set course: They wheel into bonds and conservative investments on a regular schedule, removing the temptation for a soon-to-be-retiree to unwisely double down on a hot stock market.
But there are downsides:
- Cost: Many target date funds are more expensive to own than a garden-variety mutual fund because of the high level of management required.
- Limited funds: Most use investments from only one mutual fund company, which might not have the strongest performers in all categories.
- Coordination: Because the mix in target funds changes over time, it can be difficult to coordinate them in a portfolio with other non-target fund investments for a good overall balance.
