Arrow-right Camera
The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Payout funds vary

Tim Paradis Associated Press

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.

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,” Culloton said. “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.