Life-Cycle Variety
The popular new “life-cycle” funds have far lower administrative costs, but are missing some of the innovations of certain private plans.
Less than two weeks after rolling out the new "life-cycle" funds, Thrift Savings Plan administrators say 39,398 participants have poured $1.8 billion into the funds.
That's a lot of money changing hands in one week, but the 401(k)-style retirement savings plan for federal employees has about $159 billion total invested in it by more than 3.4 million participants, so there's a lot more potential movement to come.
The life-cycle funds are meant to help participants allocate their money more effectively. The TSP is advertising a switch to life-cycle funds as putting investments on "cruise control," automatically shifting participants' money from a mix of riskier to more conservative investments as participants age.
Some investors simply don't have the time or the financial expertise it takes to develop a retirement investment strategy that makes good sense. That's the thinking behind these funds, and it's not original thinking, either.
Life-cycle funds have been around in private investment firms for almost a decade, and are a growing trend. As investments in the TSP life-cycle funds grow, here's a look at three top investment firms -- Fidelity, Vanguard and T. Rowe Price -- what they offer, and how they're different from the TSP. Many private employers provide one of these plans as an option within their 401(k) programs.
How to read the chart:
Underlying funds are the funds that already exist with these firms from which they pull to create the life-cycle funds.
Actively managed funds mean that live financial planners make continual decisions on how to invest the funds. Passively managed funds simply follow what's happening in the U.S. market, for example, the top 500 stocks.
For every basis point, 10 cents is spent for every $1,000 invested. So, if there are 5 basis points, 50 cents is spent for $1,000 invested and if there are 50 basis points, $5 is spent for every $1,000 invested.
The number of funds means the number of options offered for investors based on their target retirement date. For example, the TSP life-cycle funds are set up for people looking to retire in 2040, 2030, 2020, 2010, and before 2008, so there are five funds offered.
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Fidelity "Freedom Funds" Jenny Engle, spokeswoman |
Vanguard "Target Retirement Funds" Catherine Gordon, principal |
T. Rowe Price "Retirement Funds" Brian Lewbart, spokesman |
TSP "Life-cycle Fund" Tom Trabucco, spokesman |
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|---|---|---|---|---|
| Around since | 1996. ("If we're not the first, we're pretty close to the first.") | 2003 | 2002 | Aug. 1, 2005 |
| Amount of money managed in these funds | $38 billion as of July 2005 | $4.8 billion as of June 30, 2005. | $5.4 billion since the end of 2003 ("That's more than a ten-fold increase in the assets of those funds.") | $1.8 billion (after less than two weeks) |
| Number of underlying funds | 23 | Generally three to five. | Up to 12. | Five |
| How Managed | Actively. ("We think it's important to have an eye on the funds rather than just saying 'yeah, OK, every August and every December we're going to rebalance.'") | Passively. ("The cost is lower because [with] active managers you've got to pay the managers.") | Actively. ("We have a long, successful track record in active management.") | Passively. |
| Maintenance Cost | Ranges from 56 to 79 basis points. | Average of 22 basis points. | Ranges from 57 to 81 basis points. | Average of six basis points. |
| Number of funds | Five, in 10-year increments. | Six, in 10-year increments. | Nine, in five-year increments. | Five, in 10-year increments. |
| Inflation-protected securities | No. ("They don't factor into the Freedom Funds simply because they don't have as much of a track record.") | Yes. Vanguard Inflation-Protected Securities Fund is one of the underlying funds. | No. ("We certainly recognize how important it is for investors to be aware of the impact of inflation…we have attempted to address that issue through…maintaining a reasonable amount of equity exposure" even as investors begin to withdraw their money.) | No. Administrators are still investigating the possibility. |
How They Stack Up
Fidelity is the oldest and by far the biggest provider of these funds, although the TSP has the potential to overtake Fidelity.
Vanguard's administrative costs are the lowest among the private firms; it's the only private fund that's passively managed, and it has the lowest number of underlying funds. On the flip side, companies argue that more underlying funds means more diversity and less risk of taking a big hit. A look at the TSP's low basis points, however, reveals that the passively managed funds are in a low-cost league of their own.
T. Rowe Price is the only one of the four companies to offer the funds in five-year, rather than 10-year, increments. Lewbart said the company made the switch to five-year increments because they found investors wanted to be more closely matched to their target retirement date.
Vanguard is the single company to offer inflation-protected securities as part of their life-cycle package, meaning sky-rocketing inflation shouldn't damage the worth of these investments. The TSP board is examining inflation-protected option, and T. Rowe Price says they address inflation concerns because their life-cycle funds don't become static once investors hit their retirement they keep investing a portion of their money to earn more.
What all of these companies agree on is that life-cycle funds are an easy way for investors to opt into do-it-yourself investment strategies for big gains with little effort.