Life cycle investing lets the pros make decisions

A utomation can be a wonderful thing.

Take, for example, the introduction of the automatic fabric-softener dispenser on washing machines. I remember a time when you had to rush back to the washer to pour in the fabric softener. Even having a buzzer didn’t help me because I often got busy and didn’t hear it.

My curling iron automatically shuts off, which I’m sure has saved me from burning down my house.

Thankfully, in a similar vein, investors can select a mutual fund that will automatically adjust their investment portfolios.

This fairly new fund option, which is increasingly being offered in employer-sponsored retirement plans, is called life cycle investing.

There are two types of life cycle funds – “lifestyle” and “target date” or “target retirement.”

“The appeal of both lifestyle and target retirement funds is that, with fund management companies managing allocations, investors can concentrate on other things,” note Michael Porter and Lucas Garland, research analysts for Lipper Inc., in their 2005 report “Life Cycle Funds: Fit for Life.”

With a lifestyle fund, an investor chooses a fund based on how much risk he or she wishes to take. The fund choices might vary from aggressive (80 percent stock) to conservative (20 percent stock) or somewhere in between. While the actual asset mix may vary from time to time, the asset allocation always remains within a specific range.

A target date fund allocates the money you invest according to a preset schedule based on your target retirement date. The longer you have until retirement, the more aggressive the fund might be because you have more time to ride the ups and downs of stocks, Porter and Garland explain.

Apparently automatic asset rebalancing is appealing to investors. Assets in life cycle funds have more than doubled since 2000, making it one of the fastest growing parts of the mutual fund world, according to the Lipper report.

At the end of December 2004, the funds held $139.7 billion in assets under management. In 2000, the figure was just $63.3 billion. There were more than 244 life cycle funds at the end of 2004 versus 205 funds the prior year, Lipper reports.

Sixty-six percent of workers not currently contributing to employer-sponsored retirement plans say they would be more likely to contribute if their companies offered an investment option that automatically becomes more conservative as their retirement date approaches, according to an annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute and Mathew Greenwald &Associates.

Clearly, folks want help. Most of us who put money away in a workplace retirement plan aren’t sure what we are doing.

The fact is this investment stuff is like rocket science. Knowing how and when to rebalance your retirement account isn’t easy.

Overall, employers looking to help employees make more informed investment allocations may be able to do so more efficiently by offering lifestyle or life cycle funds, said Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute, in announcing the results of the Retirement Confidence Survey.

As with all investment strategies, there are some pros and cons to life cycle funds. Two financial advisers weighed in on this new way of investing.

The cons:

* Many of the funds, specifically the target date funds, use age as the overriding factor in determining how much of your money to put in stock, bonds or cash. “The concept is OK if you believe that everybody who’s 30 (is) the same as everybody else who is 30,” said Morris Armstrong, president of Armstrong Financial Strategies in Danbury, Conn.

“We don’t believe that the risk profile of your investments is necessarily a function of age,” said Nathan Gendelman, director of investments for The Family Firm in Bethesda, Md.

* Investors are likely to neglect a fund’s performance because everything is automatic. “You can be enduring mediocrity,” Armstrong said.

Investing in a life cycle fund doesn’t mean you shouldn’t keep an eye on returns. “Life cycle funds are ‘funds of funds,’ meaning that the assets they buy are in fact shares of other mutual funds operated by the same fund family,” Porter and Garland write in their report. “This means the funds are only as good as the fund family’s lineup of large-cap, small-cap, international, and bond funds. So, it is important to do some research before purchasing a life cycle fund.”

* Fee overload. When you buy a life cycle fund, you pay the fees charged for the underlying funds. However, some fund companies add a charge on top of that, Lipper warns. So watch the fees, which eat into your returns.

The pros:

* Surveys show people who participate in employer-sponsored retirement plans often don’t change their asset allocations once they sign up because they just don’t know what to do. Life cycle funds put the decision on how to allocate your contributions in the hands of professionals.

* Investors can avoid common mistakes such as not diversifying enough or being too conservative in their early working life. “It’s a way to outsource the decision-making about your portfolio,” Gendelman said.

A life cycle fund is the simplification and automation many investors desperately need. Think of it like the automatic rotisserie chicken oven hawked by infomercial king Ron Popeil. Set it and, for the most part, forget it.

Washington Post Writers Group

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.

A crowd begins to form before a large reception for the opening of Fisherman Jack’s at the Port of Everett on Wednesday, August 30, 2023, in Everett, Washington. (Ryan Berry / The Herald)
Seafood with a view: Fisherman Jack’s opens at Port of Everett

“The port is booming!” The new restaurant is the first to open on “restaurant row” at the port’s Waterfront Place.

Tanner Mock begins unwrapping new furniture that has been delivered on Thursday, Aug. 24, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
In Everett, new look, new name for mainstay Behar’s Furniture

Conlin’s Furniture, based in South Dakota, bought the huge store and celebrates with a grand opening this week.