More and more retirement plan providers are including a variation of lifecycle funds in 401(k) retirement plans, according to Dow Jones. These so-called custom-designed mutual funds are targeted to an employee's expected retirement date and gradually shift to more conservative asset allocations when that date approaches. But in the latest iteration, 401(k) plan sponsors are using their existing fund lineup for plan administrators to fashion into lifecycle funds-of-funds.
Custom lifecycle funds "create an immediate brand acceptance on the part of the participant" because they are made up of the core investment options, said Dano Bartolai, principal at Mellon Financial Corp.'s human resources and investor solutions division.
In 2004, assets in lifecycle funds, also called target-date maturity funds, reached nearly $40 billion, up about 66% from the $23.9 billion in assets at year end 2003, according to Morningstar.
The pick-and-choose option and greater control that employers have over asset allocation in these funds has made them popular with providers. The board of the $154 billion Thrift Savings Plan, the defined-contribution plan for about 3.4 million federal employees, last year decided to create its own lifecycle options out of its five-fund lineup. The existing funds have low costs, "so it made sense that if we could use [them], we would," said Gary Amelio, executive director of the Federal Retirement Thrift Investment Board, which administers the savings plan. "Second, participants were already comfortable with the funds, so that dovetailed into the decision."
"This is for the plan sponsor who says, 'I want to make sure that the lifecycle fund I build is based on the funds that I've selected as a fiduciary,'" said Carol Geremia, president of MFS Retirement Services, which also plans to roll out retail life-cycle funds this year.
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