| BUSINESSWEEK ONLINE : SEPTEMBER 20, 1999 ISSUE | ||||||||
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| COVER STORY
Retirement Funds for Those Too Busy to Plan Asset-allocation funds can automatically adjust to your changing needs as you age Does this sound familiar? For your entire adult life you've been working, raising a family, and quietly building up your retirement savings. All the while you promise yourself that someday you'll devote some energy to managing your investments -- perhaps once you actually retire and have some time on your hands. Turns out, you may have less free time than you think after retirement. Facing a skilled-labor shortage, Corporate America is starting to entice more retirees to keep working well into their 70s. Even if you have built up enough retirement savings to quit working at age 60, you may find you have new options for keeping your career going that are too good to pass up. In such cases, putting your retirement funds on auto-pilot may be a smart move. The mutual-fund industry has come up with a broad range of so-called asset-allocation funds that can take over the headache of managing your money and deciding how much of your retirement savings to put in stocks, bonds, and cash. MANY FLAVORS. Most major fund companies, including Fidelity, Schwab, Scudder, Dreyfus, Vanguard, T. Rowe Price, and Bankers Trust, offer investors at least three flavors -- for income-oriented, middle-of-the road, or growth investors. Some, like Vanguard's "Life Strategy" funds, are set up as "funds of funds," combining a bunch of the company's underlying funds into one portfolio. Others, like T. Rowe Price's "Personal Strategy" series, are actively managed. To get an idea for the asset-allocation mix (which vary by fund family), T. Rowe Price's income fund is generally 40% in stocks, 40% in bonds, and 20% in cash. Its balanced fund is 60% stocks, 30% bonds, and 10% cash. And its growth fund is 80% stocks, and 20% bonds and cash. If you're decades away from tapping your funds, you should choose the more aggressive version. If you want less risk, but still need a lot of stock exposure, choose the moderate version. Or if you want some regular inflow of money, choose the income version. As you approach retirement, you can switch into the more conservative offering. If that's still too much work for you, other retirement funds are even more hands-off. These evolve over time to gradually become more conservative as you get older. They're targeted toward a particular retirement date -- 2020, for example -- and slowly reduce stock exposure, add bond holdings, and generate more income over time. Take Fidelity Investments'"Freedom" family. Launched in 1996, it has funds targeted to years 2000, 2010, 2020, and 2030. Once each of these funds hits its target date, it gradually gets even more conservative until it merges with Fidelity's Freedom Income (FFFAX), which is only 20% in stocks, with the rest in bonds and money markets. According to Fidelity, the funds have been very popular in 401(k) plans. Indeed, the 2010 portfolio, with $1.3 billion in assets, is ranked in the top 10 choices among plans Fidelity administers. DIFFERENT STROKES. But in general, retirement funds targeted to a specific date, pioneered by Wells Fargo with its Stagecoach "LifePath" portfolios in 1994, haven't been a huge hit. Part of the problem is that investors don't necessarily tie risk to the amount of time they have until they need the money. "People's risk tolerance can really be different no matter what age they are," says T. Rowe Price spokesman Steven Norwitz, explaining why his firm decided to go with funds tied to different investment strategies. Choosing a date was "awkward," says Geoffrey Bobroff, of Bobroff Consulting in East Greenwich, R.I. "What date is relevant? Is it at retirement or when you actually start needing the money?" But just because these kinds of funds never really took off doesn't mean they aren't a good idea if convenience is your goal. It's certainly easier to buy one fund than to remember to shift your assets around each year. Tax reporting is much simpler when small asset-allocation shifts are made from inside a fund rather than by buying and selling individual securities. One problem all the asset-allocation funds face is performance rankings. "In the kind of hot market we've had, people are less interested in them," says Peter Di Teresa, senior editorial analyst at Morningstar. Because these funds are so broadly diversified, their returns don't come close to measuring up against the S&P 500 or other successful pure stock funds. In the past year, the more aggressive versions have done the best, with Vanguard LifeStrategy Growth (VASGX) up 29%, and Dreyfus LifeTime Growth (DLGIX) up 30%. But the S&P 500 has returned 33% in that time. Most of the income funds are up only 6% to 10% in the past year. CHECK THE GUIDELINES. It's also hard to compare these funds with other asset-allocation funds. Some include international securities, while others stick to domestic. Some concentrate on S&P 500 stocks, while others venture into small-caps. Some rely heavily on computer modeling to come up with asset allocations, while others have real people calling the shots. When choosing between them, investors should check the guidelines for how much the fund will generally keep in stocks, bonds, and cash to make sure it fits their needs. Check the expense ratio to make sure fees aren't too high. Many investors should go with the version offered by a fund company they trust, says Di Teresa. While asset-allocation funds provide a simple solution for today's time-strapped retiree, investors willing to put in a little more time can create a portfolio of funds tailored more precisely to their needs, says Di Teresa. "But I think [these funds] can be a great vehicle for someone who doesn't want to go through the process," he says. For investors who don't have a sensible retirement strategy or the time to come up with one, these funds can be a good quick fix. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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