Automatic Reallocation with Lifecycle Funds |
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The asset allocation you choose to help you meet your goals when you begin to invest in a 401(k) may no longer be the ideal allocation after you've been participating in the plan for 15 or 20 years or are nearing retirement.
Will you take the initiative to examine your portfolio and realign it if it seems advisable—for example, to shift its concentration in certain types of investments and perhaps reduce its risk potential? Or, like many 401(k) participants, you may not take the time to modify your allocation, or you may not be certain what to do—and so you do nothing.
That's where lifecycle funds come in. These funds are increasingly being offered as investment alternatives in 401(k) plans. Each lifecycle fund is designed to have its allocation modified gradually over a period of years, shifting its focus from seeking growth to providing income and preserving principal.
Usually, this is accomplished by reducing your exposure to stocks and increasing the percentage your lifecycle fund allocates to bonds. To make matters simpler, a fund's timeframe is often part of its name. So if you're thinking of retiring in about 20 years, you might put money into Fund 2030. And if your target date is 30 years away, you might choose Fund 2040.
Before transferring your balances to a lifecycle fund, you'll want to investigate the fund as you would any potential investment, looking at its objective, fees, manager, historical performance, and risk levels, among other details. If it passes those tests, it may be an alternative to consider.
Also keep in mind that lifecycle fund managers may be making allocation decisions assuming that this is your sole investment. Take the time to evaluate lifecycle funds relative to your overall investment portfolio.
One of the benefits of a lifecycle fund, also known as a target date fund, is that it may help provide a more financially secure retirement. But remember, while these funds take some of the weight off your shoulders, they don't guarantee that you'll meet your goals.
| Kick The Tires Some 401(k) plans offer asset allocation funds whose objective is to capitalize on changing market conditions, taking what could be described as a market-timing approach to asset allocation. Before choosing one of these funds, you may want to take a look at the pros and cons of market timing as well as the potential effect that frequent trading and active management may have on a fund's expense ratio, and consequently the cost of investing in the fund. |
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