A key value is that professional fund managers are more qualified to make allocation choices than inexperienced (or uninterested) participants. And as financial professionals know, proper allocation is extremely important to long-term investment success. While improper allocation can leave investors exposed to more risk than they can tolerate, or not enough to reach their retirement goals.

 Despite the wide availability of these funds chosen by plan sponsors and their increasing popularity, Spectrem Group research finds that target date/lifecycle funds are not as understood or used as effectively as they could be. Target date/lifecycle funds only make sense if the vast majority of an investor’s retirement funds are held in only one of these funds. Mixing in other funds would alter overall asset allocation and sabotages the whole premise of the investment strategy.

Spectrem research finds that participants often have target date/lifecycle allocation funds, but are unaware of them. Overall, 37% of participants say that one or both lifecycle and target date funds are available in their plans, with participants under 35 years old and men more likely to say they have asset allocation fund choices.

These numbers seem low, however, given that most plan providers have one or both types available and generally recommend that plan sponsors include them in the menu offered to participants. A lack of awareness or familiarity, of what target date/lifecycle funds actually are, may be reflected in the data shown.

Because plan participants most often select funds according to past performance, there is likely a high degree of short-term, performance-chasing involved when they make fund selections. While the published returns on most target date/lifecycle funds may be appropriate for long-term investing, their returns are not as attractive as the “hot” asset class of the past quarter. This atmosphere would have a tempting affect on participants trying to stay true to their target date/lifecycle fund.

Those who use target date/lifecycle funds express a variety of reasons for doing so. The most frequently mentioned is that they simply like them, without any specific issues cited. Other reasons include the ease of going with these funds since the plan provider is more expert at setting proper allocations and that the fund strategy description fits their age or outlook.

 While target date/lifecycle asset allocation funds are an ideal option for most plan participants, investors still need further education on what these funds are and how to properly use them. Investors who are not finance savvy, and have more unique needs, should be referred to financial planners who can offer more individual guidance, ensuring that their portfolio's asset mix is appropriate.

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