An evolving investment

Life cycle funds change as people get older and their tolerance for risk lessens

By HANK EZELL

The Atlanta Journal-Constitution

March 27, 2005

ATLANTA — Most people spend their weekdays on the job, as college professors, perhaps, or maybe carpenters or caregivers.

Many choose to invest their weekends in friends, family, lawn care or the memory of Dale Earnhardt.

Missing from those lists is the complicated, time-consuming and fumble-prone role of investment manager.

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Truth to tell, most people would be delighted to find a simple, one-stop-shopping opportunity to pick investments. That would be index mutual funds, a long-established and popular choice.

Better yet would be a one-shot-lasts-a-lifetime investment — one that adjusts itself automatically as you get older and, presumably, more conservative.

Now there is such a product: life cycle mutual funds. The first of them — very expensive and not very popular — date to 1990. Fidelity hit the market, advertising heavily, in 1996. Since then Vanguard, T. Rowe Price and a half-dozen other big names have jumped in.

We're talking big money. As an example, nine Fidelity funds in this niche have gathered more than $30 billion since opening in late 1996, according to fund tracker Morningstar. Seven competitors from T. Rowe Price have attracted $3.6 billion in 12 months.

A number of 401(k) plans offer life cycle funds now, and the federal government's equivalent of a 401(k) soon will join the parade.

So what is a life cycle fund? It is a collection of mutual funds selected to create a specified mix of stocks, bonds and cash.

It is designed for people who expect to retire in a given year, 2020 for example. A fund manager typically markets funds with different target dates. Vanguard, for example, manages Tarter Retirement funds aimed at 2005, 2015, 2025, 2035 and 2045.

The manager of each life cycle fund periodically shifts his holdings to a more conservative array, replacing stock funds with bond funds and bond funds with cash funds. A 2020 fund might have 70 percent stock holdings now, for example, and be expected to have only 20 percent stocks when 2020 rolls around.

It's a natural and desirable progression: The closer you get to retirement, the less exposure you have to stock market gyrations and the more investments you have in stable, income-producing securities.

That automatic rebalancing is a major attraction for life cycle funds. More truth: Most investors know they need to switch to more conservative allocations as they get older, and most of us never get around to it. If our stocks are winners, we sure don't want to quit now. If they're losers, we really hate to quit as losers.

The autopilot feature also helps us steer around the most common mistakes, which are buying into fads and trading too frequently.

"It's a good choice for people who don't have time, the energy or the inclination to manage a portfolio," said Bobbie D. Munroe, a certified financial planner and president of the Georgia association of CFPs. "It is the simplest way to assure that you have a diversified portfolio that is generally appropriate to your age."

Her carefully worded endorsement suggests the flip side of life cycle funds — they are mass market products, with no allowances for individual circumstances, goals and attitudes about investing.

Also, notes analyst Kerry O'Boyle of fund tracker Morningstar, "Unlike a competent financial adviser, a target retirement fund won't tell you if your goal is realistic or if you're saving enough to reach that target."

Another potential drawback is that the manager will invest only in funds offered by his boss. Fidelity buys Fidelity funds; Vanguard buys Vanguard. The T. Rowe Price Retirement 2020 fund owns shares in 13 Price funds. ,/p>

Does some other fund manager offer a better growth stock fund or a cheaper S&P 500 index fund? ,/p>

Forget about it.

Even if the product is simple to understand, shopping is not necessarily simple. Here are some things to keep in mind:

Risk. Some managers choose more aggressive investments, and some choose to move out of the stock market slower than others. You can get some comparative information at www.morningstar.com or from Morningstar's printed reviews at local libraries. Or you can get in-depth information from fund prospectuses, usually available at the managers' Web sites.

Cost. There are a few life cycle funds that take a 5.75 percent of your investment upfront, to pay sales commissions. Few people have selected these funds. As usual, Vanguard is the cheapest. Its 2025 fund, for example, contains four stock and bond funds — all of them Vanguard index funds with ultra-low fees. Annual expense of the 2025 fund comes to 0.22 percent. Others with relatively low costs include Fidelity, Price and TIAA-CREF.

Friendly faces. If you already have mutual fund investments and you like the management company, ask whether it has life cycle funds. If you're investing through a 401(k), check whether you can get a life cycle fund there.

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