Life-Cycle Funds

The U.S. retirement system has experienced a substantial transformation in recent years. It has evolved from a system in which employees relied mainly on Social Security and professionally managed defined benefit (DB) pension plans sponsored by their employers to provide for their retirement to a system in which employees must rely on their own saving and investment decisions to fund their own retirement. Defined contribution (DC) plan participants and IRA holders decide how much to contribute (up to a legally established maximum limit) to their plan, and how to invest their contributions and the contributions that their employer might make on their behalf. Thus the benefits they get at retirement depend on their own accumulation and investment decisions. DC plan sponsors are only responsible for the design of the plan and for its administration and record-keeping. Current regulations grant sponsors considerable freedom in their selection of the number and type of investment options available to participants. In practice, most plan sponsors have chosen to offer a menu of plain vanilla mutual funds plus company stock. Thus mutual funds have become the main retirement investment vehicle in the United States, and mutual fund companies the main managers of retirement assets.