OxfordPress.com

A simple retirement plan
Life-cycle funds handle aging process gracefully

By HANK EZELL

Cox News Service

November 20, 2005

Life-cycle mutual funds have grown increasingly popular, but picking the right one is not exactly a slam dunk.

There are significant differences in investment styles — some funds are more timid than others about stock market risks — and some charge unreasonably high fees.

Recent Hank columns: Prompt filers will receive tax refunds quicker than ever  A new year calls for a new financial plan  Now's the time to assess spending, saving habits  More "Bank on Hank"

But don't turn away just yet. The concept is useful: You decide when you want to retire, then you pick a fund that is designed to grow ever more mature and safety-oriented until your chosen retirement date. That is, you make one decision and the rest is on autopilot.

Billions are flowing into these funds, in part because they are so easy to understand and in part because more 401(k) retirement plans offer them every year. Recent research from the Vanguard Group suggests that two-thirds of 401(k)s now offer life-cycle funds, up from one-third only five years ago.

Investors poured $7.1 billion into life-cycle funds in 2003, $13.2 billion in 2004 and $13.3 billion in the first eight months of this year.

There are now 199 such funds, with assets of $58.4 billion. "That's more than any type of sector funds," observed Jeff Tjornehoj, a research analyst for Lipper, a major fund information company. "Real estate funds have $54.2 billion; technology funds have about $38 billion."

Why have life-cycle funds become so popular?

"They are great for someone who doesn't have a lot of time to commit to looking at their investments or someone who wants to invest small amounts through an [automatic] investment plan," said Helga S. Cuthbert, a certified financial planner in Decatur.

A life-cycle fund owns an array of other funds, each with its own specialty — U.S. stocks, foreign stocks, bonds and money market instruments.

The special appeal of life-cycle funds is that they shift gradually into more conservative investments as time goes on.

College savings plans, such as 529 plans in Georgia and other states, have the same "aging" feature, though they are built to mature at college enrollment age rather than retirement age.

"It's one-stop shopping, and the instructions are easy," Tjornehoj said. "These funds will have a retirement date in their names, 2040 or 2035 for example. It's very simple to say, 'I need to have one that fits my retirement date, and this one says it does.' "

For beginners, they are a very attractive choice. Let's say your 401(k) retirement plan gives you a choice of company stock, racy stock funds, a life-cycle fund and a conservative bond fund.

Cuthbert — and many other professionals — would send you directly to the life-cycle fund.

"If you don't have time or the inclination to do the research, it's a great way to get diversification," she said.

If you are making your own choices, outside of a 401(k), you have two ways to go. The first is to stay with a trusted name. T. Rowe Price, Fidelity and Vanguard offer life-cycle funds, with retirement dates all the way out to 2040 or even 2045.

The second choice is to do some comparison-shopping.

"I think what confuses investors is the presumption that they should all be the same," Tjornehoj said. "They are not. If you have three different managers, they are going to make different assumptions about what the future holds. One may have 60 percent devoted to equities and another has 60 percent in bonds."

For example, check out some prominent funds designed for people who expect to retire in 2025, or close to it. The T. Rowe Price Retirement 2025 fund has 82 percent in stocks, according to the most recent data from fund tracker Morningstar. Fidelity's Freedom 2025 was at 74 percent, and Vanguard's Target Retirement 2025 had 58 percent.

Which is best? It's a personal decision. Here are some questions to ask yourself: Can I accept big-time price swings without panicking? How big? How much of my portfolio will I need to cash in during the first year or two of my retirement?

There are others, but that's enough questions to start with.

In general, T. Rowe Price keeps higher percentages in stocks than the others.

"When you hit retirement, we still have you about 55 percent in equities, because we're trying to ensure that you've got a portfolio that will last and will generate income for what could be a 30-year retirement," said Price spokesman Brian Lewbart.

Vanguard spokesman John E. Demming said the company researched what customers wanted, then established a relatively low allocation to stocks.

"We believe the 2025 fund provides enough equity exposure while also reducing some of the risks with its fixed-income component," he said.

For more information, go to the fund families' Web sites or to morningstar.com. At Morningstar, click on the Funds tab, then search under Fund Family Data Pages.

A second challenge for comparison shoppers is finding out just what they all cost — both in front-end sales charges and in annual expenses. Again, Morningstar is a good place to start.

The Fidelity, Price and Vanguard funds do not levy sales charges.

Vanguard is by far the cheapest in terms of annual expenses charged to each investor. The figures: Vanguard, 0.22 percent; Fidelity 0.75 percent; and Price, 0.82 percent.

Read more "Bank on Hank" columns