For years, workers have been wooed by financial firms to open
IRAs. And at work, many have been herded into seminars on 401(k)
retirement plan investing.
For years, workers have been wooed by financial firms to open IRAs. And at work, many have been herded into seminars on 401(k) retirement plan investing.
But aging baby boomers are about to face the flip-side issue on retirement savings: How to safely spend those accrued assets once they retire.
And mutual funds companies are rushing in to help with a wave of new offerings geared toward retirees.
Recently, Fidelity Investments unveiled a series of 11 funds called Income Replacement Funds. Each has an end date, ranging in two-year increments, currently from 2016 to 2036, and a payout strategy designed to allow participants to take regular monthly withdrawals until no money is left. Later this month, Fidelity expects to unveil three additional such funds, with end dates of 2038, 2040 and 2042.
Other mutual fund companies also plan to offer their own version of payout funds for retirees: In September, the Vanguard Group announced plans to roll out three new funds, called Managed Payout Funds, for investors in retirement.
The timing of the new funds seems opportune as more people approach retirement age. According to the U.S. Census Bureau, there were 17.8 million Americans age 55 to 59 in 2006, and another 13.2 million age 60 to 64.
While the size of boomer retirement nest eggs – if they have one – varies, 2007 survey data of the Employee Benefit Research Institute show that 48 percent of workers age 55 and older have savings and investments (excluding their pension and the value of their primary home) of at least $100,000.
A big target audience for the new funds: 401(k) plan participants leaving these plans as well as holders of IRAs about to retire, some fund companies say.
Different methods offered
Because these payout products will be structured as mutual funds, they can be easily bought, redeemed and exchanged. Investors will have distinct choices in payout structures, depending on which fund company they choose.
Given its array of payout funds, Fidelity – the only company with existing payout funds at this point – provides help with fund selection.
Once in a fund, investors can bail out at any time; or they can switch into a different Fidelity fund without a penalty.
Words of caution from planners
But financial planners and others cite several concerns about these vehicles. Issues range from the fund’s lack of a track record to their limited flexibility to payout risks with at least some of these funds.
“The limiting factor, at least as Fidelity and Vanguard describe in their planned or current offerings, is that once started, they don’t adjust for what happens in real life,” says Stephen Barnes, of Barnes Investment Advisory in Phoenix.
And then, there’s the issue of risk on payout amounts in some years.
“Unlike immediate, fixed-payment annuities, which pay steady, fixed payments according to the terms of a contract, these funds don’t promise anything, including their targeted payments,” Andrew Gunter, an analyst at Morningstar Inc., wrote in a recent report.
Overall, it’s too soon to make “hard conclusions” about the funds, Gunter says.
Of course, payout funds wouldn’t have to be a lone way of getting income in retirement. And some fund mangers bill them as just one part of an overall income-producing plan.
Indeed, when Fidelity unveiled its Income Replacement Funds, it also launched a deferred variable annuity, called the Fidelity Growth and Guaranteed Income. These two products extend Fidelity’s overall choices of payout arrangements, the company suggests. “The Fidelity Growth and Income annuity is a guaranteed product with a floor on its payment level,” explains Christopher Sharpe, a Fidelity portfolio manager. “And to complement that, we wanted a mutual fund (series that also) provides an income stream.”
And for Vanguard’s payout funds, they “are just one of our options to help investors with their withdrawals,” says spokesman John Woerth. Among other products and services, he says the company offers the Vanguard Lifetime Income Program, which is an immediate annuity.
“The managed payout funds for retirement offer an opportunity for investors to diversify their income streams – and to provide a complement to annuities, a pension, and Social Security payments,” says Woerth.
