GLOBAL – The number of lifecycle fund providers is likely to increase “significantly” in the future, according to a Mercer Investment Consulting research report.

The report added that lifecycle funds are expected to develop and evolve as one of the primary financial instruments for helping employees meet their retirement goals.

Currently, this market segment is far from mature with close to $100bn (€77.5bn) in total assets under management in 2005, and five major lifecycle providers.

Half of this amount – or $50bn – was managed by Fidelity, said Mercer.

“As more plans include lifecycle programmes in their line-ups, and as these funds become default options for defined contribution plans, the asset flow into this small segment will continue to grow rapidly.

“Strong demand for these products will likely spur other fund management companies to start their own lifecycle programs.”

According to Mercer, one of the reasons lifecycle funds are becoming increasingly popular is because they simplify asset allocation and fund selection in different age and risk-preference groups for investors “who are often unprepared and unwilling to make these decisions themselves.”

However, the investment consultant warned that lifecycle programmes – which can include active and passive investment strategies - could be difficult to select and design.

Factors to consider in the selection of funds include asset allocation, the range of participating funds, allocation dynamics and maturity allocation, and rebalancing.

“While many sponsors currently decide whether to use a programme offered by well-recognised stable brands or a programme with a wide selection of proprietary funds, proper understanding of the dynamics and operation of lifecycle funds is necessary to compare and contrast the options that exist and those that will emerge in the future as this market segment develops and matures,” concluded the report.


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