PD2007: Cycling Through Lifecycle Funds

CHICAGO - When Boeing investment officials pondered the idea of adding a 401(k) lifecycle option in 2005, they came up with an unusual request.

With advice from consultant Russell, Boeing asked providers for a lifecycle option in which the underlying funds held a variety of alternative investments; the company specifically asked for REITs, emerging market equities, commodities andTreasury Inflation-Protected Security (TIPs).

Bradley Leak, Senior Manager, Investment Strategy & Asset Allocation at Boeing, told audience members at a lifecycle fund discussion panel at PLANSPONSOR’s recent PLAN DESIGNS conference, that the company eventually dropped the commodities element. Nonetheless, “We thought offering these extended asset classes was a real benefit for our participants,” Leak said.

Leak told the audience that Boeing plans to go to auto enrollment for existing employees in 2008, using a lifecycle option as an investment default. The plan now uses a balanced fund as the default choice, he said.

Joseph C. Nagengast, President, Turnstone Advisory Group, who has conducted a study of lifecycle funds (see Popping the Hood ),told the audience that in this study of 28 fund families with lifecycle options, only nine had been in place long enough to generate three-year performance data as of December 31, 2005.

Good Research Makes Good Products

Helping propel the trend has been a raft of investment research about the lifecycle option, said adviser Barbara J. Best. Vice President, Investments, Capital Strategies Group of Wachovia Securities. “It has really pushed everyone in the space and has helped improve the products,” she said. “Performance can only improve because of the excellence of the (lifecycle funds’) structure.”

Panel members emphasized that while first-generation fund offerings primarily rested on a mix from the provider’s proprietary investment lineup, more recent lifecycle funds feature an open architecture to include other providers’ funds as well.

But that push for open architecture can be both a blessing and a point of contention with recordkeepers who sometimes resist a plan’s request to host a target date fund made up of someone else’s offerings, Best warned. “We have to choose when and how hard we push,” Best said. “That (discussions with recordkeepers) is where the push has to come from.”

However, Matthew Mintzer, managing director, AllianceBernstein, said he has seen a lessening of that sponsor-recordkeeper friction over target date funds in recent months. The consolidation that has swept through the recordkeeping space has left the remaining players more open to client demands in order to keep the business.

But a little friendly persuasion still can’t hurt. “Stepping up and making that demand will help change it for everyone,” Mintzer asserted.