Lifestyle seem like a great idea. After all, people have trouble figuring out their 401(k) options. Unless you're a mutual-fund junkie, who can tell the difference between Fidelity Contrafund and Putnam Growth & Income? Lifestyle funds ease the communications task for plan providers by offering labels-for example, aggressive, conservative, or (a retirement date of) 2020-that easily state what they're about. Makes sense to me.

Unfortunately, it doesn't make sense to many participants. Yes, Fidelity has captured about $5 billion in its Freedom series. But $5 billion is chump change to a company that can pull several hundred million into a "Nordic" fund. Overall, lifestyle funds account for about $40 billion of the $5 trillion mutual-fund universe-less than 1%. Although the category of lifestyles funds is fairly new, with most entrants being less than a decade old, this nevertheless must be scored a mild disappointment.

Why? I have a couple of theories. First, plan providers clearly are failing to convey that lifestyle funds represent a fundamentally (no pun intended) different investment path. When professors Richard Thaler and Shlomo Benartzi studied 401(k) participant behavior, they found to their surprise that investors made little distinction between typical mutual funds and lifestyle funds. In either case, participants often split their assets evenly among all available options!

Second, and of greater severity, lifestyle funds feel too generic. People get excited about portfolios that are created especially for them. That's why separate accounts have become the rage among higher-net-worth investors, and why personal financial advisors will always have a large market. Instinctively, most participants just don't trust a portfolio that is assigned to them based on a single factor like risk tolerance or time horizon.

I'm not sure I agree. But that's not the point. The point is, while the basic spiel about lifestyle funds can be fixed, their generic nature cannot. As a result, these funds are likely to remain a side dish on the menu of 401(k) options. For better or worse, traditional funds will continue to comprise the main course-meaning that providers will need to educate participants through better materials, rather than a different breed of funds.

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