It's time to retool lifestyle funds for 401(k) and other defined contribution plans.
They once were seen as a solution, a default option, to relieve the difficult decision some participants have in allocating their assets in the best way among the investment options available in their plans.
But lifestyle funds have not caught on among participants in general, and, when chosen, they often are used incorrectly. Two examples are telling.
* The Wisconsin Department of Employee Trust Funds, Madison, chose another type of asset allocation modeling service, eschewing lifestyle funds for the state's $1.2 billion deferred compensation plan.
* Only 1% of assets of 806 profit-sharing and 401(k) plans, totaling $212 billion, are invested in lifestyle-type portfolios, according to a survey of the Profit Sharing/401(k) Council of America.
One problem is that participants often use lifestyle funds in ways that defeat their intended purpose. That is the conclusion of officials overseeing the Wisconsin plan and the finding of Hewitt Associates in a study of a $1 billion 401(k) plan of an unidentified sponsor in New Jersey.
The Hewitt study found most participants using lifestyle funds are mixing them with other investment allocations, or with several lifestyle funds. To most participants, lifestyle funds are just another investment option. Using them this way makes lifestyle funds ineffective, according to Mary E. Willett, director of the Wisconsin plan.
That isn't the way lifestyle funds are supposed to work. They were designed to give participants a way to have their assets allocated across a spectrum of risks at a level comfortable to them.
Thus, lifestyle funds, instead of simplifying asset allocation choices, have confused them. This confusion seems likely only to get worse, as the number of plan sponsors offering lifestyle funds has more than tripled to 30% in five years, according to Hewitt.
Sponsors, and those investment organizations offering such funds, should improve lifestyle education programs and perhaps provide a better mix of assets for the funds. Otherwise, lifestyle funds seem likely to continue to serve as an ineffective allocation tool.