Lifecycle funds, otherwise known as target date funds, seem like a good concept. Your exposure to growth assets is reduced as you approach retirement, transitioning from a substantial exposure to equities in your younger years and into fixed interest and cash investments as you approach retirement.

This makes sense if you have accumulated quite a nest egg and have a preference for preserving that accumulated wealth and want to reduce the risk (and impact) that negative returns from equities can have on a sizeable balance.

However, it doesn’t make sense for those with low balances who have little chance of building a sufficiently large nest egg for retirement and who may be better off retaining a relatively higher exposure to growth assets, as opposed to automatically being shifted (as lifecycle funds do) into defensive assets.

Lifecycle funds have become very popular in the US but when the global financial crisis hit, they weren’t able to protect members, with the US Senate initiating investigations into their woeful performance.

The fact is that these strategies don’t have a long-term track record. Some, such as Schroder Investment Management have conducted very longer term (circa 1900) historical analysis on the simulated performance of a typical Balanced fund versus a lifecycle fund (using various scenarios around changes to the growth/defensive mix) and guess what? The Balanced fund comes out on top.

Balanced funds (where close to 70% of super members are invested) certainly aren’t the answer to the longevity puzzle, but they haven’t done a bad job either, with longer term performance delivering way ahead of CPI over longer term periods.

So are lifecycle funds supposed to do a better job and should they be used as defaults? In this burningpants correspondent’s opinion – no!

There are better ways to manage longevity risk and some super funds are already doing this as opposed to taking the easy way of a homogenous product.

A better solution is for funds to gain a better understanding of members’ needs through more active engagement and adopting asset allocation not only to their age but to their balance and retirement goals.