Fidelity and Vanguard Creating Investments to Compete With Annuities
Fidelity and Vanguard, monsters in the world of mutual funds, are busy creating new products catering to the vast number of baby-boomers approaching retirement. These products are designed to compete with annuities, insurance products with guaranteed income, but are investments products so they offer no guarantees. Like target retirement funds, the asset allocation of these funds of funds changes over time, but they are managed more actively.
Fidelity’s strategy is to create “Income Replacement Funds.” While target retirement funds are organized by the projected retirement date, the Income Replacement Funds are designed to liquidate in a particular year. There will be a fund for every other year between 2016 and 2042. Between the times of investment and liquidation, the fund will provide a monthly cash payment based on investment gains and possibly a portion of the principal.
On the other hand, Vanguard will be offering three different portfolios: Growth Focus, Distribution, and Growth and Distribution (a combination). The purpose of the Growth Focus portfolio is to maintain your principal while investing aggressively. The Distribution portfolio is designed to maximize your monthly payments while preserving the principal as much as possible. The Growth and Distribution portfolio falls somewhere in the middle of the other two.
In this way, with no end date, the Vanguard funds will operate more like a university endowment.
…nlike annuities, these funds let you keep your money. After the $25,000 initial investment, you can buy additional shares or sell them without penalty, a big advantage if you need to pay for an unexpected expense.
The $25,000 investment sounds steep, but these funds are for retirees who may be changing their perspective at retirement. They will have the funds from their 401(k) and IRAs which will be tapped to help pay for expenses once retirement is in full swing.
I have not yet seen any information about projected fees to cover the operation and management of these funds.
Turning savings into income, Eugenia Levenson, Fortune Magazine, June 18, 2008.