Next Generation of Lifecycle Funds Offers Improvement

Advisers should not view the prevalence of lifecycle funds as a threat to their business, said Barbara J. Best, Vice President, Investments, Capital Strategies Group of Wachovia Securities; “we need to focus on what is best for participants instead of [on] egos.″

Although first-generation fund offerings were primarily a mix of a provider’s proprietary investment lineup, the next generation of asset allocation funds include other providers’ funds, as well as a wider variety of asset classes, said a panel at PLANSPONSOR’s recent Plan Designs conference.

Second generation products look more like a defined benefit structure, and these new funds offer great opportunities for advisers focused on the outcome of a retirement plan as a whole, commented Matthew Mintzer, managing director, AllianceBernstein. The move to include other provider’s funds in the lifecycle option is necessary Best said because there is no one organization that can be the best in all asset classes.

The expansion into a more defined benefit format is attractive for retirement plans, said adley Leak, Senior Manager, Investment Strategy & Asset Allocation at Boeing. When Boeing investment officials wanted to add a lifecycle option to their plan in 2005, they looked to providers for a lifecycle option in which the underlying funds held a variety of alternative investments; the company specifically asked for REITs, emerging market equities, commodities and Treasury Inflation-Protected Security (TIPs).

However, what might be best for the adviser and participant is not always so for the recordkeeper, who might be resistant to include outside funds in their own fund, thereby driving money away from their firm. Further, recordkeepers who sometimes resist a plan’s request to host a target date fund made up of someone else’s offerings, Best warned.

Fees continue to be a big issue surrounding lifecycle funds, because many of the lifecycle fund offerings apply an overlay fee to the underlying funds, which all have their own varying expense ratios, said Joseph Nagengast, President of Turnstone Advisory Group. This overlay is legitimate if the underlying fund is made up of nonproprietary funds, because it covers the expense of mainting the fund. However, if the fund is all proprietary funds, and the expense ratios are all going back to the recordkeeper, why should the plan sponsor and participant be paying extra, he asked. However, “While we have our eyes on the fees,’ Best said, “that doesn’t drive our decision.’

Even though most providers say they offer an open architecture platform, that’s not really the case when it comes to lifecycle funds, according to Best. Therefore, advisers and their plan sponsor clients sometimes must push the provider to include non-proprietary funds on their platforms. Not all sponsors can achieve this, but if a $100 million plan or larger asks for the new funds, the provider is more likely to acquiesce, she said. “We have to choose when and how hard we push,’ Best said. “That [discussions with recordkeepers] is where the push has to come from.’

However, Mintzer said he thinks the consolidation in the recordkeeping space has left the remaining players more open to client demands in order to keep the business. But a little friendly persuasion still can’t hurt. “Stepping up and making that demand will help change it for everyone,’ Mintzer asserted.