NEW YORK — With legions of baby boomers set to retire in the next few years, mutual fund companies are scrambling to find answers to a critical question: What’s the best way for those newly freed from the work force to tap their retirement savings?
One answer increasingly is a category of funds known variously as managed income funds or managed payout funds. They’re designed to replace paychecks with regular distributions.
But as retirement can mean golf to one person and parachute jumping to another, there can be broad differences in how these funds operate. Soon-to-retire workers should make time to examine these funds before investing.
Feeling out the differences among such funds is a bigger assignment than it was only a few months ago. Since October, when Fidelity Investments introduced its Income Replacement Funds, other big name companies have followed. Russell Investments, Charles Schwab, TIAA-CREF, and Vanguard have all set foot in this area.
Some funds, like a product from Fidelity, are designed to gradually draw down a sum of money by a certain date. Others, like a fund from Vanguard, are designed to act more like a personal endowment, making payouts while striving to protect the principal. Among the funds, some aim to keep pace with inflation, while others try to add to capital.
“You certainly have to consider what type of distributions they’re promising and how they plan to go about delivering on those promises because they differ,” said Dan Culloton, senior mutual fund analyst and editor of the Vanguard fund family report at Morningstar Inc. “You definitely have to look beyond the names to see if it really lines up with your own risk profile. What a fund company considers conservative may not be that conservative to you.”
The funds might look like annuities but it’s crucial to note that payouts aren’t guaranteed. At the same time, the fees these funds carry can be much lower than with annuities, which often make investors pay a premium for the guaranteed distribution.
Of course, some retirees prefer not to pay fees for assistance in drawing on their own money.
Allan Bertram, 83, finds the notion of managed payout funds intriguing but in the end prefers to keep his savings in a bank where his assets decline only with his withdrawals and perhaps a few minor fees.
“I manage my own money and my own income. I grew up in the Depression,” he said, noting he can be wary of some financial products.
While the newness of these funds might give some investors pause, those about to retire should remember they would likely want to use these funds for only a portion of their portfolio.
“It should not be a total solution for retirement income for any investor,” said Culloton. “Even the reputable firms have a short track record with this.”
Culloton said investors could, for example, put money for their essential expenses in something guaranteed like an annuity and keep another part in a traditional stock-and-bond portfolio. Another portion of their savings could go then into a payout fund to provide a further stream of income.
Still others who might retire early could use a managed payout fund to help bridge the gap between their last paycheck and their first Social Security check.
The funds use strategies including diversification to aim for steady payments over a long period. They could help investors navigate an ever-shifting Wall Street.
“We’ve implemented a portfolio structure that we think will help people smooth out the ups and downs of the market and we’ve implemented a distribution methodology that we think will make it easy for people to receive regular payments,” said John Ameriks, head of Vanguard Investment Counseling &Research.
“These are a solution for one set of people with a particular set of goals in mind: ‘I want to spend, I want to have access to my capital.’ There are other people in different situations for which something like an income annuity is going to be a better idea,” he said.
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