A Primer on Easy-to-Use 401(k) Funds

An increasing number of 401(k) participants are enrolling in so-called "lifecycle" funds, whether by choice or by default.

There is a small share of workers who are offered a 401(k) plan, but don't bother to fill out the paperwork or enroll. Companies select a default option for those workers, and a relatively new Labor Department regulation requires that those funds fall into one of three categories: a life -cycle fund, a balanced fund or a managed account.

Life -cycle funds start out primarily weighted in equities, but shift allocation to less-risky holdings as participants approach retirement. Such plans make sense for hands-off investors whose companies offer a 401(k) or who want to plan for retirement, but don't want to be bothered with specific investment decisions.

Balanced funds are just what the name implies -- they are diversified among a range of investments to mitigate risk, but don't change the portion of assets allocated in stocks, bonds or money-market accounts. Managed accounts are for active investors who want a hand in deciding how their investment is distributed. They come with higher fees to interact with account representatives.

The advantage of life-cycle funds is that they do the work for the client. A participant just entering the workforce might have 85% equities, 14% bonds and 1% in cash, but those positions become nearly reversed for someone who has retirement in sight, says Michael Doshier, vice president of marketing for retirement services at Fidelity.

"The attractiveness of a life-cycle fund is someone can buy it when they're 25 and they have a very different risk profile than somebody who's 65, but the fund follows them," says Doshier.

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