Cover:One Size Does Not Fit All

"Oops, We Have Changed Our Thinking"

Target-date funds have clear up sides, but they have issues. For one, simplicity has a down side, as these funds lump participants into large groups based on nothing more specific than a projected ­retirement date. "[The approach] presumes that everybody is the same, that everybody who plans to retire in 2020 is going to have the same risk profile," Larsen says. "You could have a 55-year-old who has a lot of outside assets that allow him to be more aggressive with the 401(k) plan, but what about the 55-year-old whose only asset to fund his retirement is the 401(k)? With risk-based funds, participants can try to personalize their specific circumstances and adjust their risk profile accordingly."

If people need to get lumped into groups based on one variable, some question using the projected retirement date. "You cannot pick a single date for everybody but, if you have to, you would ideally use a person's date of death," Lee says. "Retirement is not a worthwhile date. The bigger question is, how long are you going to have to draw down that money?" Most people can reasonably estimate their life expectancy, he says, and he believes that most participants would be willing to do that.

There is also a growing belief that lifestyle funds need to invest more aggressively for participants to make enough money for retirement. AllianceBernstein has been a pioneer in aggressive lifestyle fund asset allocations, and has gotten a lot of attention for its belief that participants should remain heavily invested in equities at and beyond retirement. Its lifestyle funds also favor more international equity and REIT exposure, and include no cash holdings, instead using short-duration bonds as a higher-yielding alternative with the same risk-control benefits as straight cash vehicles.

"There certainly was surprise at our initial allocations," Davies says. "If anything, we have helped contribute to the idea that, if you retire at age 65, you still have a 30-year investment time frame ahead of you. At age 65, yes, there is traditional market risk, but the biggest issue facing people at age 65 is running out of money."

T. Rowe Price felt similarly when it rolled out its target-date funds, deciding that "the model that would work best was more aggressive than most of those in the marketplace," says John Doyle, vice president, director of marketing and communications. "Our view has been that most of the target-maturity funds out there are too conservative, especially at retirement." Others seem to be coming around, he says, adding, "In the past six months, we have seen both Fidelity and Vanguard increase their allocation to equities."

"The market certainly is moving in our direction," Davies says. "Though, for somebody who has a very large, established base to say, 'Ooops, we have changed our thinking' is hard. We had a luxury, as the new kids on the block, to say, 'We have taken a totally fresh approach.'"