Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

INNOVATIVE PLAN FUNDS GOING ON LIFE SUPPORT

Reprints

The latest defined contribution plan investment innovations-lifecycle or lifestyle funds-have been slow to attract the assets of plan participants.

Between 0.5% and 1% of defined contribution plan assets are invested in these asset allocation funds, surveys by Access Research and the Profit Sharing/401(k) Council show. Consultants cite the newness and short performance history of these funds, along with participant inertia, as reasons the investment option isn't more popular.

Still, consultants say that an increasing number of plan sponsors plan to offer asset allocation funds.

Both kinds of funds offer participants a portfolio of stocks, bonds and cash, generally designed to meet certain age or risk tolerance goals. Lifecycle funds typically offer participants an asset mix based on their age, while lifestyle funds are constructed according to risk tolerance, said Robert Cummisford, a consultant with Ibbotson Associates in Chicago.

Some 401(k) plans, like that of Donrey Media Group in Fort Smith, Ark., have had a relatively strong response to lifecycle funds.

The 4,000 participants have allocated about 28% of their $95 million in assets to the five age-weighted "Lifepath" options offered by plan administrator Wells Fargo Nikko Investment Advisors in San Francisco.

Participants seem to be generally investing in the funds as they were designed to be used, committing all of their account balances and future contributions to the funds, said Don Lehman, human resources director.

"People are either choosing the Lifepath funds and putting 100% of their assets into the fund, or they are using the separate asset class mutual funds we also offer," Mr. Lehman said.

But the funds are not gaining popularity. "The percentage (of employees) using the funds has stayed pretty much the same," said Mr. Lehman. "I think we gained most of the users of the funds when we first introduced them two years ago."

He noted during last year's down market that participants investing in the lifecycle funds were more likely to leave their assets in the selected Lifepath fund and stick with their investment plan than employees who used separate mutual funds and tried to time the market.

New Donrey employees, who mostly are younger, generally are opting to create their own asset allocations using the plan's other eight investment options. "The younger employees are showing greater willingness to invest their own assets, but as they age, I expect they will gravitate toward the Lifepath funds. It's a simpler approach," Mr. Lehman said.

But the Donrey employees might be the exception.

Consultants and other plan sponsors report widely differing use of the funds by participants. Many employees don't transfer entire account balances over to the options. Some direct future contributions to the lifecycle or lifestyle funds but don't transfer existing money.

Some 10% of plan sponsors now offer such funds, but only 1% of defined contribution plan assets are invested in them, Access Research Inc. of Windsor, Conn., found in a 1995 survey.

Similarly, a Profit Sharing/401(k) Council of America survey that covered 377 plans with 1.3 million participants found that only 0.5% of assets were allocated to the funds.

About half of the companies that offer lifestyle or lifecycle funds offer a series of three options, generally with conservative, moderate and aggressive investment profiles.

Typically, those who put their money in asset allocation funds put in about one-third of their plan assets and contributions, said Gerry O'Connor, research director at Access.

That's what happened at the $380 million 401(k) plan of Consolidated Freightways Inc. in Portland, Ore.

Few employees are moving existing account balances into the funds, which are managed by T. Rowe Price Associates Inc. in Baltimore, said Dick Preston, manager/retirement plans.

"We anticipated that employees would either use one of these funds or construct their own portfolios. There's nothing wrong with this," he said. "If people are putting 50% to 60% of their retirement money in a well-balanced portfolio that they don't have to worry about and then play a little with the remainder, they are still going to be better off than if they remained invested in conservative options."

Consolidated Freightways is finding the lifestyle funds are popular with new employees.

"We introduced these funds because a lot of our employees, at all levels, don't have a lot of investment experience. We specially designed them with T. Rowe Price for undereducated investors. We are finding that the approach is appealing to new employees, where we are seeing more allocation to these funds," said Mr. Preston.

"This whole movement is still very nascent," said Dave Nadig, managing director-market strategies at Wells Fargo Nikko.

"We are seeing that many of our clients are finding that it is their new employees who are using the funds most and that among existing employees, it's mostly a move to re-direct future contributions, rather than the whole account balance," he said.

"There's a whole lot of inertia to overcome in trying to get participants to move existing money, especially since the U.S. equity markets have been so good this year," said Mr. Nadig.

Part of the reason for the slow movement of existing account balances into lifecycle/style funds is that they often are an add-on to an established lineup of investment options, according to Mr. Nadig.

The relative youth of most lifecycle/style funds is also contributing to the lack of enthusiasm by participants.

Many were established just a year or two ago. For participants being educated to look at long-term performance history in fund selection, the lack of a track record may be an impediment.

"It's very difficult now with almost any asset allocation fund to convince participants of the wisdom of investing in such an option. There's a natural bias built in now against these funds because they are limited by short performance records," said Edmund Martinez, senior manager of investments at Merrill Lynch Group Employee Services in Princeton, N.J.

Timberland Co. is now converting its $6 million 401(k) plan to a bundled service with State Street Bank & Trust Co. of Boston.

During the pre-conversion enrollment process, plan participants directed 35% of assets to three asset allocation funds within a new lineup of seven core options and a self-directed brokerage option.

The quick acceptance of the Life Solutions funds might be the result of the education program before conversion, said Jeff Porter, senior benefits analyst with the Stratham, N.H.-based shoe and apparel company.

But like participants in other companies' plans, Timberland employees are being cautious and not transferring all assets to the asset allocation funds.

"We've seen a good mix of people who are dabbling to see what these funds are about and are only putting a little money into them and those who are willing to move it all. I think time and performance may convince more to move later to these funds," Mr. Porter said.