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October 23, 2008 at 08:00 PM
The question was: How do I position the advantage of a fixed indexed annuity (FIA) having a guaranteed withdrawal benefit versus a managed payout fund? My client tells me they guarantee an income stream; is this true?
The answer is: First, let’s be clear that what your client is referring to is not guaranteed, whereas the guaranteed withdrawal benefit with a FIA is guaranteed.
Your client is referring to what are generically called “managed payout funds” or “target distribution funds.” These funds are intended to provide steady income and are/will be marketed as alternatives to immediate annuities and probably as an alternative to annuities with guaranteed lifetime withdrawal benefits. There are several versions of these currently being offered, and as with any financial vehicle, they have their pros and cons as it regards suitability and proper use in overall retirement income planning.
“Managed payout funds” are actively managed mutual funds that target an income payout rate. Some return both principal and earnings over a set period of time (i.e., over 20 or 30 years), while others are intended to provide income primarily through earnings generated by the underlying investments. As with most mutual funds, many of the fund companies have several versions that differ by the investment and income management objective.
It is critically important for consumers to understand that these are target income payments, and while in some cases they are guaranteed for one year at a time, they are not guaranteed over the long-term.
