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Sunday, May 15, 2011
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.