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Fresh Payout Funds Have Advisors Taking A Wait-And-See Approach

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New York – Payout funds, mutual funds that strive to pay regular income to fund holders, are still fresh, and that newness has advisors taking a ‘wait-and-see’ attitude, according to interviews with Income Planning.

The idea of providing a regular stream of income in retirement is one that is getting more discussion as different sectors of the financial services industry seek to meet the need that many boomers will face (see Advisors pan living benefits and payout mutual funds.)

“I tend to use bond ladders because it gives the client more control,” says Rebecca Preston, a financial advisor with Preston Financial Planning, Providence, R.I. “You know what you are getting and when you are getting it.” She says she hasn’t explored payout funds enough to decide whether she would use them with clients but suspects that she would continue to use bond ladders.

However, Preston says she admires companies’ efforts to try and meet the retirement needs that boomers will have.

John Discepoli, a financial advisor with Discepoli Financial Planning, Glendale, Ohio, says that right now he does not invest in these investments for clients because they do not have a sufficient history.

“We keep our investments pretty basic,” he says. If in time, payout funds become more tested, then he says he might take a look at them for clients. However, for the moment, he uses investments such as large and small cap funds, and long and short term U.S. government bonds.

At least one expert in the planning community says that planners she has spoken with don’t seem to be even aware of this new option yet or if they are, are not offering an opinion on them.

Among the early developers of these funds are Fidelity, Boston, and Vanguard, Valley Forge, Pa.

Fidelity offers a series of payout or retirement income funds that have “end-dates” starting in 2016 and running at 2-year intervals through 2042. These funds “are designed for use during retirement and not for accumulation ahead of retirement,” says Fidelity spokesman Alexi Maravel. “They offer professional management and a professionally managed withdrawal strategy that offers monthly payments until principal, gains and income is exhausted at the end-date of the fund.”

“You maintain 100% control of your investments with no additional fees or penalties,” says the Fidelity Website.

As an example, the Fidelity Income Replacement 2016 Fund, started on Aug. 30, 2007, has a minimum $25,000 investment and an expense ratio of .54%. There are no online transaction fees. The investment strategy is a combination of underlying Fidelity equity, fixed income and short-term funds with a shift from an asset allocation strategy that is more aggressive at inception to one that becomes more conservative.

Vanguard offers managed payout funds which started on May 5, 2008 and have a $25,000 minimum initial investment with an average weighted expense ratio of .57 to .58%. The funds invest in other Vanguard funds with per share payouts that range from $.05 to $.1167 in 2008.

The Vanguard Website says many retirement income-generating options – such as traditional balanced funds, bond funds, or annuities – require investors to set up their own payment schedule or rebalance your investments. But, the managed payout funds, it continues, automatically generate monthly payments, are actively managed with a focus on reduced volatility and are designed to maintain and grow investments. Vanguard offers 3 funds with different payout levels.


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