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This article describes certain fiduciary issues under ERISA Title I concerning the use of life cycle funds in individual account or defined contribution plans from a critical perspective. This analysis is useful because persons who have the greatest familiarity with these issues rarely, if ever, take this position. This article initially explores the nature of life cycle funds and mutual funds. It will then analyze specific issues particular to the use of life cycle funds in individual account plans.
A. WHAT IS A LIFE CYCLE FUND?
A life cycle fund is a mutual fund consisting of shares of other mutual funds, otherwise known as a "fund of funds," in which the assets are allocated amongst the underlying mutual funds in a manner which reflects the life cycle stage of individuals. Thus, life cycle funds for younger individuals typically have a higher concentration of equities than will life cycle funds for older individuals.
A "dynamic life cycle" fund is a life cycle fund which changes its allocation over time to reflect the aging of the individuals who invest in it. For example, a fund that commenced operations with an allocation of 80% equity-intensive mutual funds could gradually alter its allocation so that it invests 30% of its assets in equity-intensive mutual funds 25 years later. The advantage of this type of life cycle fund is that it does not require any action - e.g., shifting to a different life cycle fund due to aging - by the investors in such funds.
B. MUTUAL FUNDS
Mutual funds are collectively managed investment vehicles registered under the Investment Company Act of 1940. Technically, mutual funds are separate corporations, each with their own board of directors, charged with protecting the interests of shareholders. The reality, however, !has been in too many instances that the advisor of the funds, who receives fees for managing the fund's assets, tends to dominate the board of directors.
The most typical structure for a mutual fund life cycle fund provides that a mutual fund advisor will determine the appropriate mix of mutual funds that constitute the life cycle fund. The mutual fund advisor collects the management fees associated with the underlying mutual funds and then collects an additional fee for the life cycle fund...