Lifecycle Funds Boost Participation

November 28, 2005 ( - According to a new report from the Vanguard Center for Retirement Research, offering lifecycle funds within a defined contribution plan increases the likelihood that new employees will enroll.

Vanguard estimates that adding a lifecycle option increases the likelihood that newly eligible employees will participate in their plan from 39% to 45%. In its report “Lifecycle Funds Mature: Plan Sponsor and Participant Adoption”, Vanguard said this increase is smaller than the effect of adding a loan feature, but was similar to the effect of adding an employer match.

Vanguard’s research found that nearly half of new DC enrollees in 2004 and 2005 directed all oftheir contributions to a single lifecycle fund, while the remaining half combined lifecycle funds with other plan options. Existing participants had a greater tendency to over diversify.

align=”left”>Attributing the trend to better educational efforts and increased media attention, Vanguard noted that new enrollees appear to understand better than existing participants the role of life-cycle funds as one-stop investment solutions. Among new enrollees investing in life-cycle funds, 47% chose to direct all of their plan contributions to a single life-cycle fund, compared with 33% for existing participants, according to the report.

Not surprisingly, Vanguard found that static-allocation lifecycle funds did not show patterns of age-based investing, while targeted-maturity funds showed a pronounced pattern of age-based investing. With targeted-maturity funds y ounger participants have substantially higher allocations to the long-dated funds with high equity allocations, while older participants have higher allocations to the short-dated funds with lower equity exposure.

align=”left”>Static-allocation funds are aimed at matching a participant’s risk tolerance and time horizon with an appropriate asset allocation, while targeted-maturity funds are based solely on time horizon. In the case of static-allocation funds, participants overwhelmingly tended to choose two of the four options typically offered (moderate fund or conservative growth fund) regardless of age. Vanguard believes this could be because these are the two middle options usually offered with static-allocation funds.

align=”left”> Over the last five years, plan-level adoption of lifecycle funds among Vanguard-administered DC plans has increased steadily, from 33% of plans in 2000 to 63% of plans in 2005. In addition, t he percentage of participants holding a lifecycle fund in their DC plan account (in those plans offering lifecycle funds) rose from 19% in 2000 to 26% in 2003 and has remained at that level for the last two and one-half years.

Using Vanguard data on eligible plan participants in 2003 and 2004, Vanguard analyzed whether the presence of lifecycle funds positively influenced the decision to participate in the plan. Vanguard also sought to compare the relative impact of lifecycle funds with other important variables influencing participation rates, including employee compensation and age, the presence of an employer match, and the availability of loans.

align=”left”>Participants investing in static-allocation or targeted-maturity life-cycle funds are somewhat younger and less tenured than non-life-cycle fund investors, but on most other characteristics the three groups of investors are very much alike, Vanguard found.

The report can be read here .