Mutual Fund Talk

Be Careful With "Life Cycle" Funds

Unless you really want to be 100% hands-off, lifecycle funds may not be for you. If you mingle these target-date funds with other holdings, your portfolio may not act as you expected.

"Life cycle" mutual funds are supposed to be effortless: You put money in, and as you age, they automatically adjust your holdings to match your investment goals.

However, many people end up misusing them in ways that can throw their retirement-savings plans out of whack.

The problem: Because they promise diversification in a single fund, they are designed to be the sole investment in a portfolio. But investors rarely use them that way. They tend to still scatter their money across other investments.

That is risky in the long term. For instance, relatively young investors who blend a life-cycle fund with a handful of bond investments may end up with portfolios overloaded with conservative holdings. Thus, their nest eggs might not grow as fast as they could have.

Funds like these are best for people looking for a hands-off approach to investing. The funds typically provide a diversified portfolio by investing in a range of other, traditional mutual funds.

These funds are soaring in popularity: About 40% of people in 401(k) plans that offer life-cycle funds or their close cousins, "lifestyle" funds, have money in them, according to Hewitt Associates Inc. They are likely to pop up in more 401(k) plans, partly the result of a new pension law.

Hands-off investors should choose a fund with a "target date" corresponding to their expected retirement, and direct all their savings to that fund.