Correspondence: Mark Warshawsky, Watson Wyatt Worldwide, 901 N. Glebe Road, Arlington, VA 22203, USA. E-mail: Mark.Warshawsky@watsonwyatt.com

¹is a senior economist at Watson Wyatt Worldwide. His research interests include social security, pension finance and investment, lifecycle annuity-equity-bond optimisations and tax-favoured savings. Before joining Watson Wyatt, Dr Pang worked at the World Bank, conducting macroeconomic research on sovereign debt sustainability, growth and efficiency of public spending.

²is Director of Retirement Research at Watson Wyatt Worldwide, a global human capital consulting firm. He conducts and oversees research on employer-sponsored retirement and other benefit programmes and policies. A frequent speaker to business and professional groups, Dr Warshawsky is a recognised thought leader on pensions, social security, long-term care insurance, annuities and healthcare financing. He has written numerous papers published in leading professional journals, books and working papers, and has testified before Congress on pensions, annuities and other economic issues. A member of the Social Security Advisory Board for a term through 2012, he is also on the Advisory Board of the Pension Research Council of the Wharton School. From 2004 to 2006, Dr Warshawsky served as Assistant Secretary for Economic Policy at the US Treasury Department.

Received 8 September 2008; Revised 8 September 2008.

Abstract

With the passage of the Pension Protection Act of 2006 and the Department of Labor regulation regarding qualified default investment alternatives, automatic enrollment and default investments featuring more equities are likely to become more popular. This analysis compares the investment performance of a balanced fund and a lifecycle fund, using average asset allocations observed on the market. Simulations show that the balanced fund is more likely to outperform the lifecycle fund, but its more aggressive approach also leaves plan participants vulnerable to losses as retirement approaches. The lifecycle fund is better at safeguarding wealth in a downward market, while still doing a reasonable job of building wealth. The typical lifecycle fund, however, with a large cash position at retirement, forgoes hedging opportunities for the purchase of immediate life annuities. Neither fund is a sure win over the near-risk-free Treasury Inflation-Protected Securities.