Zacks Lifecycle Indexes

Zacks Lifecycle Indexes, officially branded the Zacks Lifecycle Indices, are a series of indexes developed by Zacks Investment Research, Inc., to provide a benchmark for the lifecycle allocation of target-date funds, with a different index for each target date.

Zacks Lifecycle Indexes provide comparative benchmarks for lifecycle or target-date funds that have become popular with investors saving for retirement, especially those without the knowledge or interest to be actively involved in the management of their investments. As the target date approaches, the asset allocation, or glide path, gradually becomes more conservative.

Zacks, a provider of proprietary research on securities and packaged investments, launched its lifecycle indexes in 2007. It uses proprietary selection rules to identify stocks and bonds with risk/return profiles consistent with general market benchmarks. At launch, the five Zacks indices consisted of different combinations of U.S. stocks, international developed markets stocks and U.S. bonds for funds with target dates of “at retirement” as well as 2010, 2020, 2030 and 2040.

Zacks created the lifecycle indexes to provide more in-depth details on the risk and return characteristics of target date funds or TDFs. Educating shareholders in these funds about the high level of equity exposure – and thus risk of principal loss – at the target date was one of the primary motivations for the series.

Most target date funds define their target as either “to or through” the probable retirement age of a fund shareholder, either investing “through” that date or “to” that date. As Zacks explained in its launch, most TDF glidepaths target actuarial life expectancies. In other words, most of these funds assume the shareholder will remain invested and need some combination of growth and conservation of capital during retirement and keep a portion of their allocation in higher-risk equities. Zacks believed this setup created undue risk for investors with short-term capital needs, such as funding a college education or paying for medical expenses, where losing a large portion of principal was unacceptable.

A TDF investing “to” a target date, meanwhile, would permanently shift to a conservative, capital preservation-based allocation at retirement consisting mostly of bonds and cash, with the goal of generating income while protecting principal. Critics of these TDFs suggest that retirees expected to be in retirement for 20 to 30 years or more need the capital appreciation provided by equity exposure to prevent them from outliving their retirement savings.

Another consideration is the differing glide paths followed by each provider of target date funds. The Fidelity Freedom 2030 Fund is expected to hold 53% equities, 40% bonds and 7% cash at retirement in 2030, a more aggressive allocation than the T. Rowe Price Target 2030 Fund, which would hold 42.5% equities and 57.5% bonds.