By Jennifer D. Duell

As employers across the country introduce new investment options to their employees, more people are choosing lifecycle funds as part of their defined contribution plans, eschewing risk-based asset allocation funds. Yet, many experts caution that lifecycle funds may not be the answer for all investors.

"Lifecycle funds are one of the fastest growing areas in the investment business today," says Ken Aulbach, chief investment strategist of Investors Capital Advisory Services, a financial planning firm.

These funds invest in a selection of other mutual funds based on when it will be liquidated. For example, an investor who plans to retire in 2045 can choose a lifecycle fund based on his or her retirement date. That lifecycle fund will determine the appropriate initial percentage of equities, bonds and other assets. As the retirement date nears, the fund automatically adjusts the investment allo-cations to become more conservative, dialing down exposure to stocks.

"Lifecycle funds have this intuitive appeal because people are constantly looking for convenience," says Patricia Advaney, vice president of investment solutions for Diversified Investment Advisors.

Experts contend that lifecycle funds are appropriate for people who want to invest their money and forget about it. "They are best for the hands-off investor—the one who wants a straightforward approach and who doesn't want to get involved in the day to day activity," says Robert Pagliarini, author of "Six Day Financial Makeover" and managing director of Pacifica Financial Group, Inc. "About 60 percent to 70 percent of investors are like this—they're too busy with their lives to track all these investing decisions."

Breaking the Mold

Despite their convenience, lifecycle funds have quite a few drawbacks—ones that are significant enough to create some hesitation among the investment community. "Lifecycle may be the next generation of the strategic allocation, but one of its shortcomings is that it forces investors to make the decision based on one single date, so it could oversimplify the decision," Advaney says.

Aulbach says that investors must take many things into account to obtain the best returns. "You have to think about the investor's objectives, how important their retirement funds are and their risk tolerance."

Perhaps most importantly, lifecycle funds don't recognize that people of the same age are going to have different ideas of what risk is, says Bruce Fenton, president of Atlantic Financial Inc., an independent investment firm. "It's almost insulting to try to put everyone into a box and say, 'You're 34 now, so we're going to change the allocation for you to be just like all the other 34-year-olds,'?" he says.

Indeed, experts agree that lifecycle funds are somewhat cookie cutter. "The downside of the automatic rebalancing of the investment is that no two investors are exactly alike," notes Neal Frankle, president of Wealth Resources Group and author of "Why Smart People Lose a Fortune."

For example, a 70-year-old investor with a lifecycle fund would have a portfolio that is comprised of about 70 percent bonds and about 30 percent equities, Frankle says. This person could have another 15 years to live, so bonds might not be the best investment. Personalizing Investments

Many financial professionals believe that risk-based asset allocation funds are more appropriate investment vehicles because they allow investors to personalize their investments. Investors can choose the level of risk that they are most comfortable with and make adjustments when necessary.

Asset allocation funds are easier to measure than lifecycle funds, making this type of fund far more of a known quantity, Advaney says. "This is for the type of participant who is willing to invest a bit more time in a more appropriate solution."

However, since risk-based asset allocation funds are static, they require supervision. "Investors start off with an allocation, but the allocation that was appropriate 10 years ago is not appropriate now," says Douglas Charney, senior vice president–investments for Charney Investment Group of Wachovia Securities LLC. "Investors must take an active role and make adjustments to their retirement portfolio as the market moves, as they age and as their objectives and risk tolerance change."