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Color of Money

Managing Retirement, Automatically

By Michelle Singletary
Sunday, April 17, 2005; Page F01

Automation can be a wonderful thing.

Take, for example, the introduction of the automatic fabric-softener dispenser on washing machines. I remember a time when you had to rush back to the washer to pour in the fabric softener. Even having a buzzer didn't help me because I often got busy and didn't hear it.

My curling iron automatically shuts off, which I'm sure has saved me from burning down my house.

_____Column Archive_____
Ways to Make Sure You Can Pay for the Golden Years (The Washington Post, Apr 14, 2005)
Retirement Savings By the Book (The Washington Post, Apr 10, 2005)
Read Michelle's Past Columns

Thankfully, in a similar vein, investors can select a mutual fund that will automatically adjust their investment portfolios.

This fairly new fund option, which is increasingly being offered in employer-sponsored retirement plans, is called life cycle investing.

There are two types of life cycle funds -- "lifestyle" and "target date" or "target retirement."

"The appeal of both lifestyle and target retirement funds is that, with fund management companies managing allocations, investors can concentrate on other things," said Michael Porter and Lucas Garland, research analysts for Lipper Inc., in their 2005 report "Life Cycle Funds: Fit for Life."

With a lifestyle fund, investor choose funds based on how much risk they wish to take. The fund choices may vary from aggressive (80 percent stock) to conservative (20 percent stock) or somewhere in between. While the actual asset mix may vary from time to time, the asset allocation remains within a specific range.

A target date fund allocates the money you invest according to a preset schedule based on your target retirement date. The longer you have until retirement, the more aggressive the fund may be because you have more time to ride the ups and downs of stocks, Porter and Garland said.

Apparently automatic asset rebalancing is appealing to investors. Assets in life cycle funds have more than doubled since 2000, making it one of the fastest-growing parts of the mutual fund world, according to the Lipper report.

At the end of December 2004, the funds held $139.7 billion in assets under management. In 2000, the figure was just $63.3 billion. There were more than 244 life cycle funds at the end of 2004, compared with 205 in 2003, Lipper said.

Sixty-six percent of workers not contributing to employer-sponsored retirement plans say they would be more likely to contribute if their companies offered an investment option that automatically becomes more conservative as their retirement date approaches, according to an annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute and Mathew Greenwald & Associates Inc.

Clearly, folks want help. Most of us who put money away in a workplace retirement plan aren't sure what we are doing.

The fact is, this investment stuff is rocket science. Knowing how and when to rebalance your retirement account isn't easy.

Overall, employers looking to help employees make informed investment allocations may be able to do so more efficiently by offering lifestyle or life cycle funds, said Dallas L. Salisbury, president and chief executive of the Employee Benefit Research Institute, in announcing the results of the Retirement Confidence Survey.

As with all investment strategies, there are some pros and cons to life cycle funds. Two financial advisers weighed in on this new way of investing.

The Cons:

• Many of the funds, specifically the target date funds, use age as the overriding factor in determining how much of your money to put in stocks, bonds and cash.

"The concept is okay if you believe that everybody who's 30 [is] the same as everybody else who is 30," said Morris Armstrong of Armstrong Financial Strategies in Danbury, Conn.

"We don't believe that the risk profile of your investments is necessarily a function of age," said Nathan J. Gendelman, director of investments for the Family Firm in Bethesda.

• Investors are likely to neglect a fund's performance because everything is automatic. "You can be enduring mediocrity," Armstrong said.

Investing in a life cycle fund doesn't mean you shouldn't keep an eye on returns. "Life cycle funds are 'funds of funds,' meaning that the assets they buy are, in fact, shares of other mutual funds operated by the same fund family," Porter and Garland said in their report. "This means the funds are only as good as the fund family's lineup of large-cap, small-cap, international and bond funds. So, it is important to do some research before purchasing a life cycle fund."

• Fee overload. When you buy a life cycle fund, you pay the fees charged for the underlying funds. However, some fund companies add a charge on top of that, Lipper warns. So watch the fees, which eat into your returns.

The Pros:

• Surveys show people who participate in employer-sponsored retirement plans often don't change their asset allocations once they sign up because they don't know what to do. Life cycle funds put the decision on how to allocate your contributions in the hands of professionals.

• Investors can avoid common mistakes such as not diversifying enough or being too conservative in their early working life. "It's a way to outsource the decision-making about your portfolio," Gendelman said.

A life cycle fund is the simplification and automation many investors desperately need. Think of it as being like the automatic rotisserie oven hawked by infomercial king Ron Popeil. Set it and, for the most part, forget it.

Researcher Lorraine Denis-Cooper contributed to this column.

Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at www.npr.org. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Send e-mail to singletarym@washpost.com. Comments and questions are welcome, but because of the volume of mail, personal responses may not be possible. Please also note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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