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Portfolio > Mutual Funds

Managed-Payout Funds Proliferate

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Mutual funds are proven wealth-accumulations tools, and the fund industry hopes to build on that success and retain investors’ money with managed payout funds. The idea behind the funds is straightforward.

Here’s the description of Vanguard’s funds from its website: “Managed Payout Funds are innovative in that they have a “built in” systematic withdrawal plan (SWP).With a typical SWP, you’d have to construct a portfolio, set a spending level and withdrawal program, and monitor the portfolio over time. Because the SWP is built in to the Managed Payout Funds, you get professional investment management combined with a convenient payout strategy. A second unique feature of Managed Payout Funds is their three-year rolling average payout strategy, which can lead to a more consistent payout level than typical SWPs.”

According to a recent “Wall Street Journal” article, five companies currently offer or plant to offer these funds in the near future: Fidelity, John Hancock, Vanguard, American Century and T. Row Price. (Schwab has also introduced three funds.) Fidelity’s 14 Income Replacement funds offer maturity dates ranging from 2016 to 2042. The 2016 fund has a target distribution of 12.2% for 2008 and 13.52% for 2009; in contrast, the 2042 fund’s comparable targets are 4.75% and 4.81%. Vanguard is aiming for annual distributions of 3%, 5%, and 7% with its three funds. (The Fidelity funds are designed to exhaust principal; the Vanguard funds aim to grow or maintain principal.)

The managed payout funds are new and still relatively small, but they’re worth watching. Target-date funds have proven very popular with investors who seek a simple solution to investing their retirement savings, and it’s likely that managed payout funds will have a similar appeal.


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