For many investors saving for retirement, managing their investment portfolio can seem like a formidable challenge, especially in volatile times like these. Over the past few years, lifecycle funds have grown in popularity as a convenient solution for investors who prefer to have their retirement money professionally managed using a strategically developed disciplined approach. Despite their growing popularity, however, the benefits of lifecycle funds are not fully understood.
Randall Lowry, TIAA-CREF’s Managing Director of Asset Management Mutual Fund Products, recently discussed the benefits of lifecycle funds.
What are lifecycle funds and how do they work?
Randall: Lifecycle (or target-date) funds offer a convenient, age-appropriate means for investors to save for their retirement. The funds have a diversified asset allocation, which provides for a risk-balanced approach to investing. The funds also utilize a “glide path,” which is a planned progression of asset allocation changes over time. Generally speaking, it is a reduction in equity exposure and an increase in fixed-income exposure as lifecycle funds get closer to their target dates.
What does the date in a lifecycle fund mean?
Randall: The date in a lifecycle fund’s name is the year at which the investor reaches retirement age (generally age 65).
What are the main benefits of lifecycle funds?
Randall: Lifecycle funds provide a simple, professionally managed way to save for retirement. The funds are broadly diversified across and within asset classes, providing investors with the opportunity to increase their savings on a risk-adjusted basis. By having retirement savings professionally managed, investors can avoid some of the common missteps in investing, such as not having a diversified portfolio and keeping an investment portfolio properly and continually rebalanced. Through the glide path, the funds gradually change the equity and fixed income allocation mix, so that an investor’s portfolio maintains an age-appropriate allocation.
What factors should you take into consideration before investing in a lifecycle fund?
Randall: There are many factors to consider, including:
Yet another factor to consider is expenses. It’s important to keep in mind that fees can reduce the returns on the funds in which you invest. Investors are also subject to the underlying fund’s fees and expenses in addition to the lifecycle fund’s fees and expenses.
Even though lifecycle funds have the same “target date” do asset allocations vary among fund companies?
Randall: Yes, glide paths and asset allocations can vary among target-date providers. For instance, TIAA-CREF utilizes substantial financial modeling in order to determine the optimal glide path and asset allocations. Decades of experience with our clients has shown that, in general, they have longer life expectancies than the general population, and this is incorporated into our glide path design.
Does a fund “cease to exist” after reaching the target date?
Randall: It depends on the target-date provider. Our glide path continues approximately seven to 10 years after reaching the target date. At that time, a lifecycle fund may be merged into the lifecycle retirement income fund.
After the 2008-2009 global economic crisis, one of the major criticisms surrounding lifecycle funds was that those with a 2010 “target date” had sustained losses due to their market exposure. Are there any lessons learned? Have fund managers adjusted their risk exposure for target-date funds nearing their maturity dates?
Randall: A few target-date providers changed their asset allocations to become more conservative, but most did not make major changes as their glide paths were designed for a multi-decade strategy. One advantage of a diversified portfolio is to help mitigate losses; investors with unbalanced portfolios, or those who put all of their eggs in one basket via a single-strategy fund, likely incurred greater losses. It’s also important to note that some in the media criticized the level of equities in lifecycle funds that were at or near retirement. But let’s face it, a 65 year old person might live another 20-plus years, and thus needs some growth in their portfolio to help reduce the risk of outliving their savings.
How do you select a lifecycle fund?
Randall: The glide path of the lifecycle funds are built with a number of assumptions. The main assumption, however, is that an investor is going to retire at age 65. Investors generally pick the lifecycle fund which has a target date closest to the year in which they plan to retire. For example, a person who is currently 40 years old would be 65 years old in 2036, so they would choose to invest in the age-appropriate fund that is closest to their retirement age, e.g., a lifecycle 2035 fund.
Do you have any take-away points for investors?
Randall: Lifecycle funds provide investors with a diversified, professionally managed portfolio. Investment professionals continually monitor the portfolios and rebalance them to ensure that the asset allocation remains in sync. By having their retirement savings professionally managed, investors avoid common investing missteps.
Principal value of the funds is not guaranteed at any time, including at the target date.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
Lifecycle funds share the risks associated with the types of securities held by each of the underlying funds in which they invest, including market risk, company risk, foreign investment risks, interest-rate risk, credit risk, illiquid security risk, prepayment risk and extension risk. For a detailed discussion of risk, consult the prospectus.
Rebalancing does not protect against losses or guarantee that an investor’s goal will be met.
Guaranteed retirement products are sold by insurance companies and subject to the claims paying ability of the issuing insurance company.
TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit www.tiaa-cref.org for details.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
© 2011 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), New York, NY 10017.