Katie Benner
Life-cycle funds have been revered by both asset managers and the press as a panacea for struggling retail investors who could die paupers come retirement. But like every investment product, these funds come with their fair share of caveats.
Life-cycle funds are built on the premise that we are historically bad at creating a diversified portfolio and lazy about rebalancing, so these products do it all for us. The age-based portfolios, also called target-date funds, are to be held until a specific retirement year. They begin with an aggressive mix of stocks and bonds, and then are professionally rebalanced to maintain diversification and limit risk going into retirement. These funds are most often presented as a happy medium between the defined-benefit plan of old and the freedom of a defined-contribution plan like a 401(k) or IRA. Investors get a portfolio they never have to think about until retirement. Moreover, because the funds follow the strategies created by a specific asset management company, they essentially deliver investment advice through a product. The funds recently have been in the spotlight because of the pension reform bill that passed last month. The new rules allow companies to begin automatically deferring employee earnings into 401(k) accounts. Under these plans, life-cycle funds could be the default option -- in fact, T. Rowe Price (TROW Quote - Cramer on TROW - Stock Picks) says about two-thirds of its clients who automatically enroll employees use target-date funds as their default.
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