life-cycle funds; mutual funds; aging population; diversification; equities; Pension Protection Act; retirement; retirement funding; Finance
Over the next 20 years, 76 million Americans born between 1946 and 1964 will hit the half-century mark. For most, this means facing up to the hard questions of how, or even if, they will be able to afford retirement. Only 40% of Americans feel as if their retirement investment vehicles are adequately funded. A major problem with the inadequate funding of the other 60% of these individuals’ portfolios is the fact that they are not capturing potential returns due to their failure to properly diversify among different asset classes. Over the last decade, mutual fund companies have recognized this significant business opportunity and have begun to tailor funds that target retirees specifically. Companies now offer products that give clients a one ticket diversification solution providing retirement income at a later date, usually indicated by the funds name; for example, Target Retirement 2040. These mutual funds are inherently funds of funds that pursue their investment objective by investing in other mutual funds rather than individually picking stocks and bonds. Life-cycle funds, primarily sold through 401(k)s, are designed to offer a riskier asset allocation in early years and then become more conservative as the investor’s target retirement date comes closer. The retirement funds industry has been growing rapidly with assets under management increasing exponentially. This growth is partly explained by the Pension Protection Act, passed this past year, which automatically helps employers to enroll employees in retirement plans. The law also makes it easier to designate life-cycle funds as default investments in retirement plans.
Recommended CitationLedger, Benjamin, "Funds of Funds: A Closer Look at Age-Based Investing" (2007). Honors Projects in Finance. Paper 5.