SURVEY SAYS

SURVEY SAYS: Does Your Plan Offer A Lifestyle Alternative?

By Nevin E. Adams | January 03, 2006
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March 25, 2004 (PLANSPONSOR.com) - A little while back a reader asked, "Are plan sponsors jumping on the lifestyle fund parade or are they just waiting to see if they become popular or not?" This week, we asked readers to tell us about their experience with lifestyle/target/asset allocation funds.

There is a lot of evidence that lifestyle funds are growing in popularity.   In a survey published last year, Hewitt Associates said that more than half (55%) of the large employers canvassed did so, a 20% jump from 2001 levels (see  Hewitt: Employers Luring More 401(k) Investment Activity ).   Another report from Greenwich Associates last year noted that 15% of employers are "seriously" considering adding the option, and estimated that as many as 40% of larger plans already offer this option (see  Greenwich Finds DB Bundling, Advice Trend Higher at Mid-Size Plans ).  

In fact more than three-quarters ( 76.7% ) of this week's respondents do currently offer the funds - with what can best be described as "mixed" results.   One reader summed up support for the offerings like this: " I'm a fan of these funds for one reason, they will adjust the allocation over time and, let's face it, employees just don't rebalance."

To their credit (IMHO), a surprising number or this week's respondents were using the lifestyle funds not just as an option, but as the default investment option (rather than the traditional money market choice).   As one noted, " We use Negative Election, hence 49% of all new contributions are going in to these funds.   Some folks are oblivious to this investment selection/default process, but many have said, 'Yes those are the right choices for me.'"

Allocation Stations

We didn't specifically ask about the current allocation of assets in the funds, but a number of readers offered that interesting information.   Simplistically, in terms of overall allocation, it seems to be 5% to 15% of total plan assets among those who have made an attempt to track it.   There were exceptions, including the reader who noted, "About a third of our assets are in LifeStrategy funds, but part of the reason for the high percentage is that we mapped our old profit sharing account into the LifeStrategy Growth Fund when we switched to Vanguard.   Also, we automatically enroll new employees at the 3% level unless they specifically waive out."   Another noted, "We are using T. Rowe Price's lifestyle funds, Retirement Date Funds.   Over half of our participants are invested in one of 5 funds based on your planned retirement date."   "We offer 9 investment choices, 3 of which are lifestyle/balanced funds.   Approximately 30% of the plans assets are directed by the participants into these funds," offered one respondent.   Another noted, "We added   the Fidelity series back in 2001.   They now constitute almost 9% of plan assets." 

There are problems, of course.   One notes, "We offer Putnam Retirement Ready Conservative, Balanced, and Growth funds.   I don't think participants really "get it," though, because we actually have participants with money in all three."

Some readers who don't currently offer the option did, once upon a time.   One noted, "Greatest disappointment was when we discovered that participants had invested in two or three of the funds rather than using a lifestyle fund as a broad mix of investments targeted toward risk and time.   We discontinued the funds and heard virtually no noise from participants.   Good experiment, poor result."

Alternative Solutions

Others who didn't offer lifestyle funds per se did offer alternatives to the typical "mix your own" alternative.  "…we offer two stock/debt balanced funds," said one respondent, "one 60/40 and the other 40/60 (roughly).   The 60-40 fund is our default, and we encourage participants who are not comfortable directing their investments to stay in the default fund."

Despite the fact that some don't "get it," overall, that seemed to be a small percentage of the overall audience.   In fact, one reader noted, "Although we do have some participants who clearly don't understand the purpose of a lifestyle fund since they've put a portion of their money into each of the funds, I think most of the participants do understand the purpose of these funds."   That same reader went on to note, "However, that being said, they all still chose to put only a small portion of their account into a lifestyle fund and have invested the balance of their accounts in other funds that they've chosen.   So they either believe they might be able to get better returns by choosing some of their own investments or they don't understand the purpose of a lifestyle fund as much as I think they do."  

Objections Noted

Some respondents were opposed to the concept, generally on the basis of fees, or in some cases, the objection was more philosophical.   One noted, "If you went to a Registered Investment Advisor for investment advice, and they asked you just one single question, 'In how many years do you plan to retire?' and from that gave you an asset allocation, they could be stripped of their license to practice.   One question does not make for proper due-diligence."  Another said, "I believe these funds may be attractive to employees who want to take the mystery out of the selection process.   However, I personally believe in educating our workforce through a targeted communication program which addresses risk and return characteristics in connection with the funds offered and then further expands into the associated investment fees tied to their selections."

One reader described their experience this way: "We have seen more money going into them in the past couple of years in total, but I've not broken the activity out by age or salary or anything else which might give some insight.   Now I know what to do with myself this afternoon...."

But this week's Editor's Choice goes to the reader who explained, " We introduced them in January 2003 and had VERY HIGH hopes for them…Thirty-six percent of our participants are using the options but with only 8% of their assets.   Those using the Target funds should have the majority of their assets in those funds, but they have only 30% in them.   Those using the Target funds should use fewer funds than those who are not using them, but they use more (average of 5.4 versus 2.4).   Thirty-six percent of our participants are using the options but only 1% strictly as intended (100% of their assets in the funds and only using one or two of them). [Pause…take deep breath…recite Serenity Prayer…]…These funds are awesome.   We have very high hopes for them…."

Thanks to everyone who participated in our survey!