What's in a name? When it comes to Lifestyle Funds and Life-Cycle Funds (also known as Target Date Funds), the answer is: plenty! Investors can be forgiven any confusion over the similarly-branded mutual funds.
Life-Cycle Funds and Lifestyle Funds are examples of asset allocation funds, which provide 401(k) plan participants with the diversity and risk management recession-weary investors may appreciate. Asset allocation funds ideally generate consistent returns through investment in a mix of stocks, bonds, and cash. The most basic form of asset allocation fund is a balanced fund, which traditionally offers a fixed allocation of about 60% stocks and 40% bonds.
Life-Cycle Funds (also known as Target Date Funds) were created to help investors achieve their financial goals within a specified period of time. It builds toward an expressed horizon event such retirement, buying a home or college. In the early going, the fund is more aggressive. As the event nears, and preserving capital takes on added importance, the fund will shift to safer, more conservative investments.
Lifestyle Funds are actively-managed asset allocation funds that, as the name implies, takes its cue from the investor's risk tolerance, be it aggressive, moderate or conservative.
According to our research, several factors shared near equal importance in selecting which funds investors selected. Topping the list were fund expenses, past performance, specific companies in which the fund invests, and the fund’s level of risk as explained by the plan provider.
Investors also considered whether the fund had a guarantee of a minimum return, whether it was “designed” for investors who shared their financial attitudes and behaviors.
Of those who invest exclusively in asset allocation funds, the two major reasons given were a preference to let a professional financial advisor make the decisions and ease of use.
Those who choose not to invest any of their contributions in asset allocation funds expressed primarily two reasons. The first was that they thought they could earn better returns by selecting their own funds. The second was that they didn’t understand how asset allocations work.
Are asset allocation funds right for you? Which type of fund should you select? Identifying your risk tolerance and advisor dependency and establishing your investment window will help you make the best decision for you.