Vanguard: Lifecycle Funds Can Help Sponsors Hit Home Runs

July 31, 2006 ( - Plan sponsors who combine lifecycle/targeted maturity funds with auto enrollment and auto deferral increases come close to hitting a home run in the retirement plan arena, according to a new report.

A research document by the Vanguard Center for Retirement Research at The Vanguard Group claims that by putting all three in place, the plan sponsor stands the best chance of helping employees be the most effective retirement savers.

Asserted Vanguard, “As the traditional pension plan loses prominence, some experts worry DC plan savings will fall short for many retirees. Targeted-maturity funds can help fill the gap by offering participants solid, comprehensive investment solutions. Additionally, the funds provide unique benefits for plan sponsors in that they have been shown to help improve key plan statistics, such as enrollment rates and plan diversification.”

The target maturity funds have been popular, Vanguard said, because they can be easy to use, offer professional management, have a “sophisticated asset allocation process,” and allow participants to easily target their intended retirement date.

Having such a fund into which a participant can deposit his or her entire retirement net egg helps overcome “detrimental participant behaviors, such as inertia and choice overload,” Vanguard said.

The researchers acknowledged that one downside is that some investors use the funds as “one-of-many” instead of putting all of their assets in one lifecycle option. By investing in too many funds, shareholders potentially risk undermining the effectiveness of such an approach or diluting long-term portfolio returns.

The report said that nearly two-thirds of Vanguard US DC plans offered lifecycle funds in 2005, up from one-third of plans in 2000. The report also estimates that adding a lifecycle fund option, such as a targeted-maturity fund, to a plan’s investment menu increases the likelihood from 39% to 45% that newly eligible employees will participate in their plan.

“Plan sponsors seeking to boost plan participation should consider adopting lifecycle funds,” Stephen Utkus, coauthor of the study and director of the Vanguard Center for Retirement Research, said in the report.

The Vanguard report is here .