Growth of lifecycle mutual fund packages simplifies retirement planning
Don't despair! In these anxiety-ridden times, several mutual fund companies have stepped forward with a bold message of hope.
The news hasn't received a lot of coverage. You may have missed it in the swirl of negative dispatches concerning the economy, where the main question that remains to be settled is which evil force -- inflation or deflation -- will do us in first. So here's a quick recap.
Fidelity Investments, the Boston-based manager of $1.1 trillion, has lately extended its lineup of US lifecycle funds, managed toward specific future retirement dates, to include the Fidelity Freedom 2045 and Fidelity Freedom 2050 funds.
Lifecycle funds with target years of 2045, 2050 or both are also now up and running at ABN AMRO Investment Funds SA; AllianceBernstein Holding LP; American Century Investments; Handelsbanken Pension 80-tal of Sweden; Principal Investors Fund Inc.; Putnam Investments; T. Rowe Price Group, and the Vanguard Group. Though these companies may not have said so directly, the implication is clear. They have staked their credibility on the proposition that there actually will be a year 2045 and a year 2050 -- and that in those far-off days civilized people will still be investing money and planning such personal indulgences as retirement.
This is radical stuff for many of today's sophisticated investors, who spend most of their time thinking about the perils of the next hour or the next week. On the rare occasions when they do look decades ahead, it's to recalculate the most probable date when Social Security and the world's retirement system will be officially declared bankrupt.
Another oddity about lifecycle funds: They represent a big step toward simplicity at a time when complication is in vogue. Professionals at investing institutions are busy adding ``alternative investments" such as hedge funds to their money-management plans. You don't buy bonds anymore, you deal in bond derivatives such as swaps.
Stocks are no longer viewed as individual securities. Their returns are lumped together into index-based and other theoretical bundles, then sliced apart again into pieces labeled alpha and beta.
Apparently unimpressed by all this, many small investors planning for retirement and other long-term objectives are opting for a put-it-away-and-forget-it approach represented by lifecycle funds. These mix stock, bond, and money-market funds in a single portfolio that is adjusted to become more conservative as the investor gets older.
Lifecycle funds add a second layer of professional management, taking over the job of asset allocation on top of security selection, which is done by the managers of the individual stock, bond, and money funds. For activist-minded fund investors, this may be a bit too prefab -- more help than they want. But the idea has proved appealing to people looking for simplicity.
In the first half of 2006, according to consultants Financial Research Corp. in Boston, so-called target-date funds accounted for two of the 10 best-selling categories of funds. Funds with target dates from 2015 to 2029 took in a net $8.6 billion, and funds with target dates of 2030 and beyond attracted $6.4 billion.
Three other types of ``allocation" funds that mix asset classes together also made the bestseller list. World allocation funds had inflows of $9.4 billion; moderate allocation funds $6.9 billion, and conservative allocation funds $3.6 billion. Together, those five categories pulled in just a shade less than $35 billion in new money, or almost one of every four new dollars flowing into US stock and bond funds.
As enthusiastic as they have been about lifecycle funds, investors also have displayed some ambivalence. In the great majority of cases, they have embraced the idea for some, but not all, of their retirement savings. Wrong, all wrong, say pension professionals. A lifecycle fund is supposed to be a complete package, and if you mix it with other funds you thwart its purpose by veering from the formula.
Let's cut the clientele some slack. They learned long ago to be careful about putting all their eggs in any single basket.
Chet Currier is a Bloomberg News columnist. 
