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New Type Of Mutual Fund Aimed At Retirees

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By TIM PARADIS, The Associated Press

Published: October 11, 2007

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 through retirement.

Much 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 similar products 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.

Although 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 I. Greer, president of fixed income and asset allocation at Fidelity.

The funds gradually shift to 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.

'For the 30-year fund we expect people to get their initial investment back in 12 years. So if you put $100,000 in, you will have been paid out $100,000. That's sort of the median time. It could be shorter, it could be longer,' Greer said.

In any case, though, investors should keep in mind that these products are designed to keep pace with inflation but are not a sure bet.

'They don't really seem to be competing with annuities because it's not a true insurance product but it resembles one from the investors' view,' Tjornehoj said.

'It's not a silver bullet to meeting your retirement needs. There are going to be those who would prefer to have an immediate annuity. They would rather have lower returns and receive the same check every month from their asset manager than to be exposed to vagaries of the stock and bond markets,' he said.

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