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.”