Thursday, August 02, 2007

The Allure of Lifestyle Funds

EBRI has just released its 2006 survey of employee 401K plans. I plan to use a couple of posts this week to review some of the most interesting findings. Today I would like to talk about the topic of balanced or lifestyle funds in 401K plans.

One of the points that come through very clearly in this new report is that more and more employees are opting for lifestyle or other balanced funds. According to the report (figure 33 and figure 34), depending on age group, about 45% - 47% of newly hired employees hold such funds. In addition, in 2006, of those employees that held balanced funds, a large minority (about 40%) held more than 90% of their assets in these funds.

For those of you that are not familiar with the concept of lifestyle funds, these are funds that have a pre-determined allocation of stocks and bonds. This allocation shifts and becomes more conservative as the investor ages.

What is the draw of balanced funds? The greatest asset of lifestyle funds and other balanced funds is that they are simple. They are easy to understand. They are not scary. I mean, let's face it, the vast majority of American workers are not personal finance bloggers, and investing is not a mandatory class in high-school or even college. Many people are scared of investing. They don't know anything about it, and they don't know where to get the information. The promise of the lifestyle fund is the allure of simplicity, and if there is anything people like it's ease of use.

Lifestyle funds, offer investors an easy way to achieve diversification and a reasonable ratio of risk and reward, without requiring them to become master investors. This is a great example of the direction 401K plans should take. While offering more sophisticated options for those us who feel comfortable investing our own money, 401K plans should strive to simplify investing for the average worker. The less scary those plans seem to the novice investor, and especially to young employees, the more people will invest for their retirement and the better off we will be as a society.

So, kudos to whoever invented the lifestyle fund. You are hereby awarded the Shadox Prize of Personal Finance (the "Shpefi"). The Shpefi is slightly more prestigious than the Nobel Prize, however it does not involve any monetary compensation, medals or meetings with royalty. I am working on those aspects of the program, and will keep you posted.


MoneyDork said...

Wow. I downloaded and just finished printing the brief. I can't say I'm horribly surprised, but it is showing that people are putting more money in their retirement. Of course you do have to wonder how this compares to the current "credit crisis" that Wall-Street is dealing with. I was also surprised by how many people are borrowing against their 401(k)s. For some reason, I consider it taboo to even touch that unless you are having massive unexpected medical bills, or your house is being foreclosed upon, or something really extreme.

Div Guy said...

Shadox. I think Lifestyle funds are great for starting out as well. I have had the Alpine International Real Estate Fund for a couple of years. Take a look at my site, I posted this morning on my retirement asset allocation.

Shadox said...

MoneyDork - I too treat my 401K plan as a "do not touch" fund.

Div Guy - thanks for the info about Alpine. I actually looked at them a couple of weeks ago, and even wrote a post on the subject. The fund seems solid, but I think I will wait a year or two before moving into that segment. Valuations seem too rich for my blood.

Div Guy said...

I have to agree on the current valuations of the Alpine Intl RE Fund. I recently sold some of the fund to bring me back to my original 7% allocation.