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"…the bull market made most equity investors look good. …2003 was a good reminder that 'the majority of 401(k) participants would benefit by professional help in managing their portfolios'."
"Especially after the bear market we've gone through, these [life cycle] funds give people things they want: diversification and simplification."
"A life cycle fund will never be the hottest fund of the year. But with hot funds, you have to know when to sell."
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What Are Life Cycle Options?
- Fully diversified single investment option that is matched to
participants' goals, risk tolerance, and investment time horizon
- Professional investment management and asset allocation based on
fund's objective on an ongoing basis
- Integral part of prudent investment menu design
for choice plans
Why Life Cycle Options?
Life Cycle Options Do
Work:
- Manning & Napier's white paper,
A Solution to Participant Confusion,
details an approach that has resulted in life cycle participation rates
in excess of 50%1. The paper cites three actual case examples of how
Manning & Napier's technique of integrating menu design and
communication has worked to reach out to participants.
Benefits to Participants:
- One-Stop Investment Shopping - Participants can choose a fully diversified, single investment option with asset allocation already done right within the fund.
- Professional Asset Allocation - Investment experts allocate fund assets on an ongoing basis to meet the fund's objective.
- Retirement Investing Made Easy - Participants simply decide which objective is the best fit based on their personal situation and leave the rest to the experts.
Benefits to Sponsors:
- Prudent Menu Design - Sponsors avoid the risk of forcing participants to translate their basic investment objectives into a specific mix of stock and bond funds.
- Less Educational Burden - Sponsors no longer have to attempt to educate all participants to the level of a savvy investor.
- Satisfied Participants - Sponsors that use life cycle options in conjunction with appropriate asset class options provide a well-rounded menu design that may satisfy all types of participants.
- Reduced Fiduciary Liability - Sponsors who design a plan menu around the premise that participants have varying levels of investment expertise take a key step
toward managing fiduciary liability.
How to Choose Your Life Cycle Options
| Select a coordinated family of life cycle options from a
single manager. |
Select several "balanced" or "asset allocation" funds from
different managers. |
| Benefit: Offers a range of distinct
options
that allows employees at each different investment time horizon and risk level to
take advantage of professional asset allocation. |
Drawback: Can increase participant confusion over
the differences between alternative options. Participant decisions are likely to be
based on name recognition of the managers and short-term performance, clearly in
contrast with the objectives of a well-designed participant menu. |
| Fund assets consist of individual securities both
equity and fixed income. |
Fund assets consist of other mutual funds. Each underlying
fund manager operates independent of the other funds. |
| Benefit: Allows the best opportunity for a manager
to provide value-added returns on a consistent basis. |
Drawback: Can lead to over-diversification and a
lack of coordinated risk management. Can also result in payment of multiple
management fees (For example, for a life cycle fund, fees are charged by both the life cycle fund and the underlying funds.) often
for generic asset allocation and index-like performance. |
| A professional investment manager constantly adjusts the allocations
in the portfolio to attain an appropriate asset mix for the fund's objective on a
forward-looking basis. The expected trade-off between risk and return for each asset
class is based on today's market and economic environment - not historical
averages. |
A static mix of stocks and bonds is maintained based on
historical data regarding the typical return and volatility of those asset types. The
investments will remain in this particular mix of assets regardless of what the
market is doing. |
| Benefit: Maximizes the risk-adjusted rate of
return through value analysis as market conditions change. This is key to a life
cycle option meeting its investment objective over different market and economic
environments. |
Drawback: Can fail to achieve even modest return
targets over long periods of time because passively managed funds are not able to
take advantage of favorable market conditions and offer no protection during
difficult markets. A preset passive mix may not meet the fund’s stated objective. |
| A value-added history of making asset allocation decisions
over long-term time periods, including dampening market volatility in the tough times
and participating in capital growth during bull market environments, is most relevant
in assessing a manager's track record. |
Academic studies
confirm that performance rankings over calendar year time periods provide little
predictive power. Short-term time periods (e.g., rolling 1, 3, and 5 year periods)
are dominated by either a bull market in which more aggressive managers will have the
best relative performance, or a bear market in which conservative managers have the
advantage. |
| Benefit: Evaluating risk and return through both
bear and bull markets shows how effective a multi-asset class manager has been in
achieving the portfolio's objectives over a full range of environments. |
Drawback: A life cycle fund manager who lacks experience with multi-asset class fund management through both bull and bear markets does not illustrate the capability to effectively achieve the portfolio's objectives over a variety of market conditions. |
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