New funds work like an endowment

  • Associated Press
  • Friday, October 12, 2007 7:20pm
  • Business

NEW YORK — Investors who use target-date funds to put their investments on cruise control until retirement face a common question: How will I manage my money so it holds out once I’ve stopped working?

A new type of mutual fund could appeal to some investors asking this question. Fidelity Investments, the nation’s largest fund manager, this month rolled out a set of funds designed to provide enough of a return to last someone through retirement.

Like target-date funds, which automatically shift their investments into more conservative areas such as bonds as an expected year of retirement nears, the new income-replacement funds are designed to take the guesswork out of asset allocation. But these funds are aimed at retirees.

Using this set-it-and-forget-it approach, investors estimate how long they will need to have money coming in for their post-work years and then stand back to allow the fund’s overseers to do the rest.

“These funds are designed to function like an endowment, to provide a regular stream of cash distribution,” said Ellen Rinaldi, principal and head of investment counseling and research at Vanguard, which last month filed plans with regulators to offer products similar to those now offered by Fidelity.

With many workers now relying on 401(k) accounts and similar plans instead of pensions to see them through retirement, some investors might be feeling nostalgic for the comfort of a check that arrives regularly.

But while the funds can be set up to operate like an annuity and pay out a steady distribution every month, they make no promises. While annuities carry higher expense ratios, their payments are also guaranteed. With the new products, if the stock or bond market takes a hit, for example, a fund might have to dip into an investors’ principal to come up with the money for the monthly payment.

For that reason, the expectations for the payouts are kept modest, said Jeff Tjornehoj, an analyst at fund tracker Lipper Inc.

“I think they’ve structured these products with realism in mind. When people try to go about doing this themselves, they may be too aggressive in the beginning. Here we have well-respected names taking the guesswork out of the process,” he said.

For example, among Fidelity’s 11 new income replacement funds, one with a 30-year horizon has just over a 5 percent payout rate and an expense ratio of 0.65 percent.

“We will manage the drawdown to make sure they’re getting the payment until the very end of the period,” said Boyce Greer, president of fixed income and asset allocation at Fidelity.

The funds gradually move into more conservative investments such as bonds as the fund’s end date approaches.

“They wanted flexibility and liquidity for their asset planning so they can respond to all the vagaries that life throws at them and they wanted it for cheap,” Greer said, referring to investors seeking something other than annuities.

They are designed to let investors receive more money early on in retirement when they might be more active — taking that long-awaited trip, for example — but still leave enough left to make payouts in future years.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.