From the December 2007 issue of Research Magazine • Subscribe!

Industry's Focus: Retirement Income

Mutual funds and the organizations that sell them continue to introduce a variety of retirement-income products to position themselves for further market opportunities. And it's no wonder.

According to a recent report issued by the Investment Company Institute, Americans' retirement assets hit $16.6 trillion as of March 30. That's up 1.2 percent from $16.4 trillion in December 2006.

But more than three-quarters of baby boomers over the age of 55 still have less than $100,000 in investable assets, points out Chip Roame, head of Tiburon Strategic Advisors. Plus, more than half of those reaching 65 years of life will reach age 85 and thus have serious longevity-related income concerns, says Roame, who hosted the Tiburon Strategic Advisors CEO Summit XIII in October in San Francisco. This means many of those near or in retirement could benefit from retirement-income advice.

The Vanguard Group, for instance, recently filed a registration statement with the U.S. Securities and Exchange Commission for a new series of mutual funds that aims to provide monthly payments to investors in retirement.

The proposed Vanguard Managed Payout Funds are set to be structured as funds of funds and invest in Vanguard domestic and international stock index funds, bond and REIT index funds, and inflation-protected securities and money market instruments. The funds may also allocate a portion of their assets to commodity-linked investments, as well as pursue market-neutral and other absolute-return strategies, the company says.

"The Managed Payout Funds will broaden Vanguard's lineup of retirement income solutions, which range from traditional balanced and life-cycle funds to immediate annuities and customized withdrawal plans," says Vanguard CEO John J. Brennan. "We believe that the new funds will appeal to individuals who are seeking a regular income stream in retirement, but who also want to retain access to their accounts to meet unexpected expenses or, potentially, for estate planning reasons."

Each fund is designed to provide level monthly payments throughout the year. The Managed Payout Real Growth Fund, Managed Payout Moderate Growth Fund and Managed Payout Capital Preservation Fund are expected to sustain managed distribution policies with 3, 5 and 7 percent annual distribution rates respectively.

The Vanguard payout funds should have an estimated expense ratio of 0.34 percent and will not entail a sales commission or a 12b-1 fee. Vanguard currently manages more than $1.2 trillion in U.S. mutual fund assets, including more than $325 billion in employer-sponsored retirement plans.

In early October, Fidelity Investments also began offering more innovations in retirement income. The new products include Fidelity Income Replacement Funds, which blend managed asset allocation with a withdrawal program, and a deferred variable annuity, Fidelity Growth and Guaranteed Income. To complement these products, Fidelity rolled out a new retirement income Web portal within Fidelity's retail and advisor websites.

"Retirees struggle to understand how much of their savings they can comfortably tap each year without placing their future lifestyle at risk," explains Rodger A. Lawson, president, Fidelity Investments. "To alleviate those concerns, we're launching two innovative products with unique benefits for retirees: a new deferred variable annuity with an income guarantee and a new type of mutual fund designed to provide income replacement."

The Fidelity Income Replacement Funds are a series of 11 funds of funds with horizon dates in two-year increments from 2016 to 2036. They combine an asset-allocation strategy with a withdrawal program.

Similar to Fidelity Freedom Funds, the funds start out with a more aggressive asset allocation weighted toward equity funds for potential growth and gradually shift over time, as the fund's target end date approaches, to a more conservative allocation emphasizing fixed-income and short-term funds. They have an optional, monthly payment program at no added cost.

Investors can add more money, turn on and off their monthly payments as desired, exchange into a fund with shorter or longer horizon dates, take additional withdrawals or sell the fund if needed, without penalty. The expense ratios range from 0.54 percent to 0.65 percent.

"We anticipate that retirees will use these funds as income-building blocks, mixing and matching funds with different time horizons and target payments, and even laddering them with other income products such as annuities, to create a variety of income streams to spend down their retirement assets while meeting changing needs," says Boyce I. Greer, president of Fixed-Income and Asset Allocation, Fidelity Investments.

Fidelity also has introduced the web-based Fidelity Retirement Income Evaluator, offered by Fidelity Investments Institutional Services Co., the recently re-named Fidelity Institutional Wealth Services Company and National Financial (see sidebar on right).

At Old Mutual Asset Management, Matthew Appelstein, senior vice president of product strategy and retirement-solution planning, says retirement-income planning has become a key focus of the organization. "This is where the market is heading," he explains. "It's the name of the game."

The firm is set to roll out a series of lifecycle funds in the first part of 2008 geared to this need. "We want to do a series with a risk-metrics overlay that gives clients conservative, moderate, aggressive and other suitability options."

It is partnering with Ibbotson and hopes the series "will be a key differentiator for us," according to Appelstein. "We are trying to be more innovative and have 12 to 14 managers involved with our lifecycle funds, which are very diversified."

Related to these efforts, Old Mutual Asset Management hired Charles Christopher "Chris" Herman in June to serve as vice president and director of retirement solutions. Herman is responsible for building and heading a team that develops, evaluates and markets retirement-oriented investment products to retail and institutional clients.

Herman joined the firm from Mercer HR Services, where he helped form Mercer's institutional retirement and benefits outsourcing business and spearheaded the launch of Mercer Retirement Solutions, a fund-of-funds outsourcing solution for defined benefit plans; before, he had been a director of rollover IRA and securities services for Putnam Investments.

"The value for clients is to work with advisors and discuss which track of our series they should be invested in and how they can change that as needed," Appelstein continues. "We bring advisors into the fold more."

At MassMutual, Jerome Golden, president of the income management strategies division, is heading up the firm's launch of retirement management accounts, or RMAs, which blend funds and a Mass Mutual multiple-premium immediate annuity.

These accounts are now being distributed through 2,500 RIAs, who work with MassMutual's affiliated broker-dealer MML Investors Services.

However, "a number of the RIAs position themselves as being independent and providing independent advice," says MassMutual's Golden. "The most important thing for them and for the third party is to have open architecture on the mutual fund piece.

"Today, the RIAs have a choice among four diversified portfolios with Oppenheimer funds," continues Golden. "This was a practical way for us to get to market [in 2006] -- the so-called RMA 1.0 -- and now we're moving to open architecture. This is critical and will be part of RMA 2.0 for 2008. And we will make sure that any client and any advisor with 1.0 can take advantage of 2.0."

In mid-year 2008, MassMutual aims to take RMAs to more independent advisors and advisors with independent broker-dealers.

"These are important decisions [for the broker-dealers], and these conversations take some time," Golden shares. "We are not a product as much as a way of doing business or a practice model - with a way for advisors to go after this income space. It's an important conversation for us and for them."

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From IRA to RMA:

Why has Mass Mutual introduced the Retirement Management Account?Advisors are building retirement-income portfolios that include equities for growth and a payout annuity for income security.

What is it?The RMA is a rollover IRA and an investment advisory program; it includes mutual fund model portfolios, a payout annuity, a cash reserve, an income planning tool and an income administration system.

Why is it different?The RMA is an advisory program that can actually help clients manage individualized income plans with advisors; the annuity included is a multiple premium immediate annuity (Flexible Benefits Annuity).

What is retirement annuity laddering?This involves incremental purchases of annuity income benefits with assets transferred from mutual fund model portfolios over time.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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