Research and actual participation evidence shows the opting-in feature significantly increases participation in retirement accounts--which is important. I guess it also proves that many people are too lazy to check a couple of boxes and sign the bottom line, but that's a whole new subject area.
Also, I see the value of lifecycle funds as an investment vehicle for those who just don't want to be bothered thinking about investments. Those caught in the headlights can just buy the lifecycle fund and stick with it. It is a lot better than wringing your hands and procrastinating on the savings program. With lifecycle funds. there is absolutely no excuse for not starting a retirement savings program.
The lifecycle funds are intended, of course, as an investment for all assets. Many people don't understand this and pick them as an investment choice among several other fund--which doesn't make sense.
The main drawback of lifecycle funds is that they are a one-size-fits-all solution. Unfortunately, investors come in different sizes. In other words, for example, all 65-year-olds aren't the same. Some have concerns about running out of money and need to be a bit more conservative. Some are flexible and are willing to take on additional risk to achieve their financial goals. Others have sufficient assets and running out of money is not a concern. Their primary goal is leaving assets for heirs and for charities. They have the capacity to take on more risk in search of higher expected returns.
The bottom line is that, IMHO, lifecycle funds are a good starting point for thinking about asset allocation. If a person's goals are pretty much in line with the average investor and the volatility of the fund has been examined and is acceptable, then it is a good, easy way to go. If these conditions aren't met, then it makes sense to do a bit more research and learn how to tailor a program to align with specific needs and goals.
"I like the idea that many 401k plans automatically opt-in new employees and put them in a lifecycle fund that changes asset allocation over time."
ReplyDeleteVery nice of them to do this! I wish others did the same as well! Target funds are better than trying to pick funds with absolutely no experience in doing so. And most have no idea how to go about doing this.
But as you say, as they familiarize themselves with investing, new investors can gradually branch out.
Rather than having an associated "target year" for their retirement, it might be better to have a lengthier, more detailed description of each fund. I agree with you Robert: the one size fits all idea won't really work well.
ReplyDeleteI suggest, for people who don't have pensions to look forward to, that their target retirement fund should have a fixed income allocation that approximates their age, or their age minus 10, if they want slightly more risk. Vanguard's target retirement funds, for instance, are slightly riskier, based on their target dates of retirement. For instance, their target retirement 2010 fund has less than 50% in bonds, yet I would consider 50% as a bond minimum for someone retired, without a pension. I've heard many people suggest that the Vanguard target funds are too conservative. But I don't think so. I guess it proves what you were outlining in the first place. There's no such thing as "one size fits all"
This site was a great resource for writing my own article called "55 ways to better manage your money when you are young and have little". Great content! Check out my article when you get a chance.
ReplyDelete55 ways to better manage your money when you are young and have little