Lifestyle funds finally have begun to attract more assets.
Still, many defined contribution plan executives appear to be waiting to offer them to employees until the funds can demonstrate three-year track records.
Fidelity Investments' three Asset Manager funds, the oldest, dwarf the competition with $12 billion more than the next biggest fund family, Vanguard's LifeStrategy funds. Fidelity's first lifestyle fund was established 81/2 years ago.
But newer funds are beginning to attract cash flows.
For example, Boston-based Fidelity's latest asset allocation funds, the five actively managed funds in the Freedom Series, attracted about $70 million in their first six months of operation. The $15 billion General Motors Corp. plan is one corporate DC plan using the new funds.
The four passively managed LifeStrategy funds from The Vanguard Group of Investment Cos., Malvern, Pa., have attracted $2.3 billion since their inception Sept. 30, 1994. The four funds are likely to see a big growth spurt after they have a three-year record, said Shelton S. Unger, a principal of institutional sales and marketing.
Ms. Unger said most requests for proposals ask for asset allocation funds; many sponsors say they are only waiting for a three-year record before adding the funds to their line-up.
Demand for lifestyle mutual funds has been great enough to persuade Frank Russell Investment Management Co., Tacoma, Wash., to this month launch its own series. Russell's five LifePoints Funds use a manager-of-managers approach and the asset allocation strategy it has provided to clients for 12 years in other forms.
Several $100 million plans are adding the new Russell funds to their investment options line-up, including Duke University, Durham, N.C.
But while cash flow is improving, fund managers aren't seeing quite the torrent they expected when they started the funds two and three years ago.
Lifecycle funds are age-weighted and attempt through asset allocation to reach a savings goal by a specific date. Lifestyle funds are managed to match the risk tolerance of individual investors.
Large plans create own funds
Some executives at larger 401(k) plans are opting to offer the concept, but executing it through customized mixes of commingled funds, rather than pre-packaged mutual funds.
"We're not seeing very many plans with 1,000-plus employees using packaged lifestyle mutual funds," said Stacey Schaus, a principal at Hewitt Consultants L.L.C., Lincolnshire, Ill.
"Larger clients don't seem to see the value added in using a manager to do their strategic asset allocation for them," Ms. Schaus said.
The customized blend creates "inexpensive lifestyle funds that they offer as core options," Ms. Schaus added.
Peter Smail, president of Fidelity Institutional Retirement Services Co., Boston, disagreed. He said the new Freedom funds are "incredibly popular" with large plan sponsors.
Mr. Smail said there are many different ways of pitching the funds to plan participants, but most Fidelity clients offer the lifecycle fund series as core options for investors unwilling to bother with making their own asset allocation decisions.
Mutual fund vendors seem to be having a tough time selling the asset allocation funds on an investment-only basis to defined contribution plan sponsors.
Consultants said most plan executives don't search for lifestyle funds, but rather offer whatever series their bundled record keeper offers. One reason: each series is managed so differently that peer group performance comparisons are practically impossible.
Financial advisers like concept
Lifestyle and lifecycle funds have been popular with retail investors and with financial intermediaries who recommend them to small defined contribution plans and moderately wealthy individuals.
Much of the recent growth in Vanguard's LifeStrategy funds has come from retail and intermediary channels, said Ms. Unger, but she expects that to change with time.
"We know from experience that these funds don't work in an institutional setting without the educational component. As more plan sponsors add the funds as options and participants receive more education about them, we expect to see even greater inflows," she said.
The Horizon Funds from Kemper Funds Group, Chicago, also have seen far more retail than institutional money - primarily from financial advisers - since their inception Dec. 29, 1995. The three funds had $112 million as of March 31.
William Chapman, president of Kemper's retirement plans group, said it's harder to sell the funds to plan sponsors than to financial advisers, who consider the funds an efficient choice for small investors.
"The fee-based planner can't afford to do a full-blown asset allocation for an investor with a couple of thousand dollars,' he said.
"With these funds, they get a good quality asset allocation product at a reasonable price. Planners can provide the service a lot cheaper this way than if they tried to do it themselves," said Mr. Chapman.
Frank Russell's new LifePoints funds also are expected to play well in the financial adviser channel, where Russell has assisted advisers with portfolio construction using the same risk-weighted asset allocation strategies on which the funds are based.
"These funds simplify the delivery of the portfolio construction assistance we've been providing to advisers," said Mollie G. Jensen, director of marketing.
"It's now available in an off-the-shelf product and it's only to allow the financial advisers we work with to cannibalize the small end of the retail market. It's a logical extension that these funds can be easily applied to the defined contribution plan market, and our clients are asking for them," she added.
Frank Russell funds hire as many as 25 different managers to run portions of the underlying assets in each of the five funds.
Participants aren't convinced
Meanwhile, the education Vanguard's Ms. Unger mentioned as vital to getting employees to use lifestyle funds doesn't seem to be sinking in for many plan participants.
Kemper's experience is that 51% of retirement plan participants put 100% of their account balance and direct all future contributions to a single lifestyle/lifecycle fund. But most vendors say anecdotal evidence shows most plan participants aren't using a single lifestyle fund as the "one-stop shop" the funds were intended to be.
Ms. Schaus of Hewitt said she has seen participants divide all their assets equally among four lifestyle funds in a series.
Where a stable value fund is offered, said Mr. Chapman of Kemper: "Some 401(k) participants are using the funds to dip their toes in the water. If they like the funds, if they perform up to their expectations, then they will likely allocate future contributions to a single fund, but many people aren't moving existing balances."
Jim Heaton, senior vice president at Federated Investors Inc., Pittsburgh, agrees participants tend to park their money in it and allocate just a little to a lifestyle fund.
Bull market hinders growth
"It's been hard to explain to a lot of investors throughout raging equity markets in 1995, 1996 and part of 1997 why lifestyle funds are needed or why diversification is so important," Mr. Heaton said.
He noted lifestyle funds "haven't done as well as the equity indexes because they are diversified to provide downside protection. That tends to lower upside growth. But if the market tanks, these funds will become a lot more popular."
Federated Investors managed $600 million as of March 31 in its series of four lifestyle funds, according to Morningstar Inc., Chicago.
Performance of the various lifestyle funds available is "impossible to compare," said Mr. Heaton.
Various composite benchmarks can be contrived and the asset classes within each fund can be compared to indexes or similar peer funds or strategies. But in the end, he said, "there is no clear way to compare these funds apples-to-apples on performance," he added.
"Even the consultants can't do it with funds having such different styles - from active to passive to a disciplined, quantitative approach to asset allocation the wild, seat-of-the-pants ride," Mr. Heaton said.
"It's a huge challenge to communicate to sponsors or participants the mechanics of the performance of these funds."
Mr. Chapman of Kemper said in the end, most participants will compare a lifestyle fund against the performance of the Standard & Poor's 500 Stock Index.
"I think it's totally fair to compare lifestyle funds to the index because it is what is ultimately what's relevant to the participant. What you're talking about is investor expectation, and they expect their fund to do better . . . than the S&P."
