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Having trouble picking investment funds?

For most people, the hardest part of saving for retirement is not deciding if they should save, not deciding how much to save, but trying to decide which investment fund(s) they should pick. Don't take my word for it—all you have to do is ask your personnel director or that financial advisor who just spent 30 minutes walking through your 401(k) options. They'll tell you that the number one question they get—bar none—is "What funds do you think I should pick?" So, if you are struggling with that decision, cheer up: You are not alone. However, a growing number of retirement plans now make available an option that can help you make that choice. It goes by different names: Most people call it a "lifestyle" fund, but you also may hear it called an "asset allocation" fund (generally by those who want to impress you with their financial prowess).
What's a Lifestyle Fund?
A lifestyle is how you live (or want to). A lifestyle fund is a fund designed for how you should invest (or want to) based on criteria such as your age, retirement goals, and tolerance for risk (more on that in a minute).
Putting It Together
When you pick investment funds in your retirement plan, and decide how much of your contributions to invest in each fund, you have done what investment pros call "asset allocation" (pat yourself on the back). The same type of thing happens with a lifestyle fund. Someone chooses from several mutual funds and decides how much money to invest in each. One major difference between your picking investment funds and the lifestyle fund is the decision on which funds and how much is being made by someone who is an investment expert. Another major difference? That investment expert will continue to keep an eye on those funds and the investment markets every day—and will make adjustments as necessary. Let's face it, most of us have trouble doing that even once a year.
Getting Started
For some lifestyle funds, all you need to know is when you are planning to withdraw the money—and the assumption is that that is when you retire. For instance, if you are planning to retire in 2041, you might be directed toward a fund with a name like "TargetFinder 2040," which suggests a targeted retirement date in 2040. Most of the lifestyle fund options today offer funds in 10-year brackets (2020, 2030, 2040, 2050, etc.), but there are options available today that offer five-year brackets.
More sophisticated approaches look beyond the simple target withdrawal date, and also focus on your personal tolerance for risk. For example, can you live with some "bumpiness" in the markets (and in the value of your retirement plan account) on the road to retirement, or will worrying about temporary losses keep you awake at night? After completing a short form (generally called a "risk tolerance questionnaire"), you will get some idea as to what type of investor you are: generally conservative, moderate, or aggressive.
Having determined your personal tolerance for investment risk, you then generally are directed to one of several options.
Watch Out For:
Cost. All lifestyle funds are not created equal. For starters, there is generally the usual assortment of mutual fund costs from each of the underlying investment funds, disclosed in the prospectus. Beyond that, some lifestyle funds also include an additional charge on top of the regular charges. A growing number, however, don't. Look before you leap.
Doubling Up? Remember that a lifestyle fund, properly used, is supposed to make it easy for you—allowing you to pick a single fund and get a diversified portfolio instead of having to build it yourself by picking out individual mutual funds from your retirement plan menu. Unfortunately, studies have shown that participants sometimes treat lifestyle funds as just another investment fund, and invest a little money in two, three, or even four different lifestyle funds. If you do that, you could be creating a portfolio Frankenstein that could be more work, more expensive, more volatile—and give you less retirement security. Use the lifestyle option properly; pick one—and no more.