Fidelity Targets Retirement Income Needs
Kurt Brouwer October 13th, 2007
This particular topic is a pretty hot one in the relatively staid world of mutual funds right now. Essentially, mutual fund companies want to compete more effectively with life insurance companies in meeting the retirement income needs of millions of upcoming Baby Boom retirees. Unfortunately, the topic is littered with appeals to emotion and confusion over how income is defined, but that’s nothing new, whether we’re talking about insurance companies or Wall Street.
Susan Kelly at Financial Week reports, Fidelity Seeks To Provide Cash for Retirees With Income Needs [emphasis added]:
‘…Brokerage giant Fidelity Investments today rolled out two new products—a set of mutual funds and a variable annuity—designed to help baby boomers turn their nest eggs into a steady stream of retirement income.
“What we hope these two products do is add another option in the solution set [baby boomers] have for their retirement income,” said Boyce I. Greer, president of the fixed income and asset allocation division of Fidelity Management & Research.
As the 78 million baby boomers begin to retire, the financial services industry is increasingly focused on the issue of generating income for them in retirement. That is perceived to be a bigger problem than it was for earlier generations of retirees because boomers are less likely to have traditional company pension plans, and their Social Security payments will replace less of their pre-retirement income. Last week Vanguard announced three Managed Payout Funds, funds of funds that help retirees generate income from their investments by providing monthly payments.
Mr. Boyce described Fidelity’s Income Replacement Funds as “a new type of life-cycle funds.” The 11 funds, with maturities every two years from 2016 to 2036, are funds of funds that provide a monthly payment to investors. Like life-cycle funds, the Income Replacement Funds’ asset allocation becomes less risky as their maturity date approaches. But they vary from life-cycle funds in that investors will have been paid back all of their principal and investment earnings by the time a fund hits its maturity date.
The amount of an investor’s monthly draw will be reset every year, based on the performance of the underlying investments. Investment management fees on the Income Replacement Funds range from 54 to 65 basis points. Investors have the option of turning the payments off and on, as well as the option of transferring to another fund with a different maturity…’
I think these new mutual funds could prove reasonably interesting. They are an attempt to help retirees manage their cash needs. This is something financial advisers do routinely, so it’s nothing new. And, it’s not really new in the mutual fund industry either. In the late 1980s fund companies fell all over each other pumping out GNMA mutual funds that paid out a monthly check. GNMA or Ginnie Mae stands for:
‘ …A government-owned agency which buys mortgages from lending institutions, securitizes them, and then sells them to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities.’
GNMA funds were very popular, but then fell out of favor because the ‘income’ they paid out was actually in part a return of your own principal. Incidentally, this is also true of annuities (see below). GNMA funds represented a forerunner to this current iteration of income replacement funds. I will take a ‘wait and see’ attitude on the mutual funds, but I am much less favorably-inclined to the annuity mentioned in the second part of this announcement:
‘…The new variable annuity, the Fidelity Growth and Guaranteed Income, provides investors with a minimum monthly payment that is guaranteed for life, but it allows for that payment to grow if the underlying investments perform well. The level of payment is reviewed every year, and once the monthly payment has been boosted, that’s the new baseline, even if the underlying investments perform poorly in subsequent years.
Investors will pay a mortality and expense fee on the Growth and Guaranteed Income fund of 110 basis points for a single life and 125 basis points for joint life, plus investment management fees…’
Like many financial advisers, I have not recommended annuities to clients. My objections are practical in that annuities are hybrids that combine investment management and insurance coverage and often do not do terribly well at either. They also are designed by insurance companies so very few ordinary mortals can understand them. They also presume on the future. Is a given insurance company going to exist 30 years from now? Will they have hidden clauses that let them off the hook?
Finally, and this is more of an emotional objection, their sales tactics really irritate me. For example, the phrase ‘guaranteed income for life’ annoys me. If you are 65 years old and you buy a 30-year Treasury bond, don’t you have income for life in effect? You’ll have the yield on the bond guaranteed by the U.S. government for the next 30 years and that period is likely to cover almost everyone for life. But if someone is lucky enough to live past 95, then the government also guarantees to give you your money back at the end of 30 years so you can reinvest it. And, you can sell your holdings any time you want if something comes up unexpectedly.
Or, if you invest in PIMCO Total Return Bond Fund, don’t you, in effect, have income for life? It will pay out income indefinitely to shareholders as it has since inception. It’s not guaranteed, but the likelihood that a diversified portfolio of high quality government and corporate bonds will pay off is very high.
As I’m stepping off my soapbox, I’ll just finish up with this thought. Wall Street is very good at coming up with new ideas to get you to invest your money. But, remember, Wall Street does not have a very good record of delivering on new and complicated investment solutions. So, make sure you invest your time before you invest your money.
Update: Here are other posts on retirement issues:
New 401(k) Plan Regulations Should Increase Retirement Assets
Will You Run Out of Money In Retirement?
- Investing , Mutual Funds , Personal Finance , Retirement
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I like your spin on 30 year Treasury bonds as being a guaranteed income for life. I think a lot of people are simply attracted to the words “guaranteed income for life”. If people thought of the bonds (secured, high quality) in this light, then we could essential eliminate the need for annuities. I guess that’s where the sales tactics and marketing comes in to entice clients to park their money with the insurance company.