A new way to invest after you retire
Fund companies entice baby boomers with new 'payout funds' that promise to stretch retirees' money over set time periods.
from the December 31, 2007 edition
Page 2 of 3
Different payout 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.
For example, Fidelity's offerings are designed to allow regular withdrawals that will grow to meet inflation over the specified length of a particular fund – after which time the funds will end.
But Vanguard's payout funds are expected to operate indefinitely. Each of its three funds will make payouts based on the funds' targeted annual distribution rate. The funds will offer conservative, moderate, and aggressive approaches with annual payout rates of 3 percent, 5 percent, and 7 percent, respectively. The funds are expected to debut in early 2008.
The DWS Scudder LifeCompass Income Fund for retirees, expected to be launched in January, will have a fixed dollar payout, sources say. Specifically, that offering will provide a fixed payout of 82.5 cents per share per year for 10 years. Sources add that the fund also will come with a financial warranty from Merrill Lynch Bank USA – meaning that if the fund lacks enough assets to make the distribution, it can tap Merrill Lynch Bank to make it. When the fund matures after 10 years, at least 17.5 percent of the fund's initial asset value will be returned to investors on a per share basis.
Given its array of payout funds, Fidelity – the only company with existing payout funds at this point – provides help with fund selection. Among its tools: a calculator on its website that can help find which payout fund best corresponds to a retiree's expected income needs.
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 (and thus, ability to meet specific investors' needs) 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. "For instance, if there is a major change in either your income need or value of your portfolio ... you don't have the flexibility to make changes to the plan. [The fund] just continues at how it was originally structured."
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. "In Vanguard's funds, for example, if their holdings don't generate enough income from dividends – from either stocks or bonds – in a certain year, the funds may have to return investors' capital to meet [their] distribution target for that year, causing following years' payouts to be lower. Fidelity's have similar caveats."
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