Born in 1994, lifecycle funds stand poised for adolescence as well as controversy. Like many teens, they have grown quickly, jumping 11.2 percent annually since 2004—more than twice the mutual fund industry’s 4.5 percent rate. Already, these funds have $82 billion, and they keep climbing.
But to put things in perspective, lifecycle funds are only a fraction of the $10 trillion mutual fund industry, and their rapid growth doesn’t mean they will become the ultimate retirement fund. In fact, a lot of pundits doubt that these funds are the right answer for retirement investments. Others, however, contend that lifecycle funds and their kin—lifestyle funds—are the painless way to ease into retirement.
“I think right now [these funds] are on a roll,” says Joe Nagengast, founder of Turnstone Advisory Group in Marina del Rey, Calif., where he advises financial advisors. Nagengast wrote a manifesto-like report on lifecycle funds. “They have undergone tremendous growth. It’s unbelievable,” he says.
A top investment officer in San Francisco agrees. “They’re so popular because of their ease of use,” says David J. Goerz III, senior vice president and chief investment officer for HighMark Capital Management, a wholly owned subsidiary of Union Bank of California. Goerz, who manages a portfolio of $20 billion in assets, says, “People understand the index market, and that’s what makes [these funds] attractive.”
But Bill Harris, a financial planner in Duxbury, Mass., feels differently. “This is a communist product. That’s because for every investor, it’s exactly the same. They jam them all into one.”
Communistic or capitalistic, lifecycle and lifestyle funds are like a “fund of funds,” or six to 12 offerings from the same fund family. Each fund is composed of a portfolio of different funds, chosen and allocated as a group, to attain definite levels. Lifecycle funds are concerned with timing. Let us say a 40-year-old investor wants to insure that when he retires in 25 years, he will have enough money to live on for the rest of his life. Lifestyle funds, which are also used for retirement, deal more with risk, automatically adjusting the balances of risk and reward to the investor’s desires for the balance of his or her life.