From the December 2008 issue of Research Magazine • Subscribe!

December 1, 2008

Morningstar's Flexible Retirement-Income Series

Morningstar Investment Services Inc., a registered investment advisor and subsidiary of Morningstar Inc., has introduced Morningstar Managed Portfolios Retirement Income Series. This managed-account service includes three actively managed portfolios designed to generate retirement income over specified time horizons and risk levels. This fee-based discretionary investment management program is offered exclusively through financial advisors.

Each retirement-income portfolio is designed for investors in a different stage of retirement -- short range (two to 10 years), mid range (10-20 years), and long range (20-plus years) -- and aims to support annual cash flows of 4 percent, 5 percent and 6 percent of the client's initial assets.

Similar to the asset allocation in an endowment, the portfolios are diversified across various alternative asset classes, including global fixed income, high-yield bonds, commodities and absolute-return strategies.

Morningstar Investment Services uses Monte Carlo simulation to help derive portfolios that have high probability of supporting annual cash flows in line with the target payout rate over the respective time horizon.

Weak performance in the current bear market has resulted in some retirement-payout funds distributing principal as a major component of their payouts, a result that has soured many advisors on payout funds. Morningstar's funds address that concern by permitting flexible payouts, according to Bill Harding, CFA, director of research for Morningstar Investment Services.

Harding believes the portfolios' broad diversification and payout flexibility will enhance the portfolios' appeal to advisors and their clients. "For each portfolio, we've stated a recommended payout range," he says.

"This payout is not automatically paid out to the clients -- it's more of a suggestion as to the level of withdrawal the portfolio can support over time to meet the objectives. The client and advisor can work off that and set up a systematic withdrawal plan, but it's not automatically paid out nor is it guaranteed," explains Harding.

"One downside of having an automated payout in markets like this is that it's more likely you'll have to dip into the capital base to achieve that payout. By not having an automatic payout, the advisor and client can use their discretion whether they truly need the money at this time. It may make sense to not take the withdrawal or take a lesser amount."

More information about the Morningstar Managed Portfolios Retirement Income Series is available at: http://corporate.morningstar.com/US/documents/MarketingOneSheets/ADV_MPF_Retirement_Income.pdf.

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