But before jumping into an all-in-one life-cycle fund, there are a few drawbacks to note.
Overlap Potential
Because life-cycle funds are designed to be stand-alone offerings, investors could have a difficult time allocating the rest of their money.
"The life-cycle fund is only picking for your 401(k), and you have to look at all of a person's assets," says Lewis Altfest, president of financial planning firm L.J. Altfest & Co. A person may have all equity stocks or funds outside of his or her pension, so to pile on equities with a life-cycle fund may not be appropriate."
The problem also emerges when the life-cycle date funds are held in conjunction with other retirement products.
"For example, if you've maxed out your 401(k) and have an IRA, what should you own in that account that won't overlap with your life-cycle fund? It's very hard to know," says Greg Carlson, a Morningstar fund analyst who covers life-cycle funds.
According to Vanguard research, life-cycle funds are being misused by many investors who own them. In its report
How America Saves 2005, the fund giant reiterates that life-cycle funds are meant to take care of all of an investor's needs by providing complete diversity and rebalancing, but that "actual participant behavior is at odds with this goal, with many participants using life-cycle funds as just another part of their overall portfolio."
Katie Benner
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