Funds Designed to Put Retirement on Autopilot
Sunday, October 14, 2007
NEW YORK -- Investors who use target-date funds to put their investments on cruise control until retirement face a common question: How will I manage my money so it holds out once I've stopped working?
A new type of mutual fund could appeal to some investors asking this question. Fidelity Investments, the nation's largest fund manager, this month introduced a set of funds designed to provide enough of a return to last someone through retirement.
Like target-date funds, which automatically shift investments into more conservative areas such as bonds as an expected year of retirement nears, the new income-replacement funds are designed to take the guesswork out of asset allocation. But these funds are aimed at retirees.
Using this set-it-and-forget-it approach, investors estimate how long they will need money coming in after they retire and then allow the fund's overseers to do the rest.
"These funds are designed to function like an endowment, to provide a regular stream of cash distribution," said Ellen Rinaldi, principal and head of investment counseling and research at Vanguard, which last month filed plans with regulators to offer similar products.
With many workers now relying on 401(k) accounts and similar plans instead of pensions to see them through retirement, some investors might be nostalgic for the comfort of a check that arrives regularly.
While the funds can be set up to operate like an annuities and pay out a steady distribution every month, they make no promises. While annuities carry higher expense ratios, their payments are also guaranteed. With the new products, if the stock or bond market takes a hit, for example, a fund might have to dip into an investor's principal to come up with the money for the monthly payment.
For that reason, the expectations for the payouts are kept modest, said Jeff Tjornehoj, an analyst at Lipper, which tracks mutual funds.
"I think they've structured these products with realism in mind. When people try to go about doing this themselves, they may be too aggressive in the beginning. Here we have well-respected names taking the guesswork out of the process," he said.
For example, among Fidelity's 11 income-replacement funds, one with a 30-year horizon has just over a 5 percent payout rate and an expense ratio of 0.65 percent.
"We will manage the drawdown to make sure they're getting the payment until the very end of the period," said Boyce I. Greer, president of fixed income and asset allocation at Fidelity.
The funds gradually move into more conservative investments such as bonds as the fund's end date approaches.
"They wanted flexibility and liquidity for their asset-planning so they can respond to all the vagaries that life throws at them, and they wanted it for cheap," Greer said, referring to investors seeking something other than annuities.
They are designed to let investors receive more money early on in retirement when they might be more active, such as taking a long-awaited trip, but still leave enough left to make payouts later.
"For the 30-year fund, we expect people to get their initial investment back in 12 years," Greer said. "So if you put $100,000 in, you will have been paid out $100,000. That's sort of the median time. It could be shorter, it could be longer."
In any case, though, investors should keep in mind that these products are designed to keep pace with inflation but are not a sure bet.
"They don't really seem to be competing with annuities because it's not a true insurance product, but it resembles one from the investors' view," Tjornehoj said.
"It's not a silver bullet to meeting your retirement needs. There are going to be those who would prefer to have an immediate annuity. They would rather have lower returns and receive the same check every month from their asset manager than to be exposed to vagaries of the stock and bond markets," he said.