Heritage Foundation Leadership for America

Opponents of Social Security reform contend that Personal Retirement Accounts would be ?too complicated? for the average American. They argue that workers would jeopardize their retirement savings by making bad investment decisions. Thus, the government should retain control over these funds, perhaps investing some Social Security dollars itself (a bad idea in its own right). However, the new ?life cycle fund? offered by the Thrift Savings Plan, a retirement planning program for federal employees, is a model of how personal accounts might work?and how simple they could be.  

TSP officials compare using the life cycle fund to putting a car on ?cruise control.? Such funds are designed to meet an employee?s changing needs automatically, shifting portfolio composition from higher-yield, equity-heavy diversifications to safer, bond-heavy ones as the owner approaches retirement. For example, with the Vanguard Group?s ?Target Retirement Funds,? an investor in her twenties would have roughly 80 percent of her portfolio in stocks; by her forties, the composition would be roughly 60 percent stocks and 40 percent bonds; and by retirement, her portfolio would be a conservative 30/70.

Thus, life cycle funds greatly simplify the investment process. The President?s plan for Social Security reform would make use of these same sorts of investment funds, using smart investment portfolios like the TSP?s as a model. These would be the automatic option for account holders, who could, if they so choose, opt out and invest their money in other broad stock and bond funds. But if the success of life cycle funds are any indications, their use in personal accounts will prove extremely popular. According to the Social Security Information Center, ?55 percent of defined contribution plans now use Life Cycle Funds,? just a few years after they?ve become widely available.