401k Plans

• Life cycle funds are often seen in workplace retirement programs like 401k and 403b plans, and many workplace plans now include at least a few life cycle or target date funds. To participate in these funds, investors simply choose the date that corresponds most closely with their planned retirement date, i.e., 2030, 2040. The fund manager then moves the money from riskier but higher yielding investments like stocks into safer choices like bonds as retirement gets closer and closer.
  
  

Default Choice

• Some companies now encourage new hires to participate in the company 401k by automatically enrolling those workers unless they specifically opt out. When these automatic enrollment plans are in place, the default choice is often a life cycle fund. Making the life cycle fund the default makes it easier on the employees, since they do not need to take any further action. The company simply enrolls those new workers in the target date fund that best fits their needs, based on each worker's age. Employees can move their money around later, but the default investment option is the life cycle fund.
  
  

Pros and Cons

• One of the biggest advantages of a life cycle mutual fund is its simplicity. If you are a hands-off investor, this type of fund can be an excellent choice, since the fund manager makes all the asset allocation decisions for you. On the other hand, these funds can be expensive, so if you are an active investor you might do better creating the desired investment mix on your own.
  
  

Build Your Own

• If you are an experienced investor, you might be able to build your own life cycle fund at a much lower cost. The first step is to determine what percentage of your assets you want in the stock and bond market at various stages in your life. You then use low cost index funds to create that desired asset allocation. For instance, as a younger worker you might want 80 percent in stocks and 20 percent in bonds. You can create that asset allocation by putting 80 percent of your investment assets in a low cost stock market index, and the rest in a bond index fund. As your needs change, you can adjust this asset allocation simply by selling some of your shares in one mutual fund and purchasing shares in another.