Determined to carve out its stake in the coming Baby Boomer retirement rush hour, Fidelity Investments of Boston has just unveiled a pair of brand new retirement income solutions designed to work together or separately. The products-a family of income-producing mutual funds-of-funds and a variable annuity guaranteeing income-were two years in the making, Fidelity officials said.
The 11 Fidelity Income Replacement Funds will act like lifecycle funds in that they have target dates in two-year increments ranging from 2016 to 2036. Each will have a designated underlying asset allocation among other Fidelity funds and start aggressive and get more conservative in allocations.
But this new series of funds, which Fidelity hopes will emerge as a truly unique new category of funds, has added features that other lifecycle funds lack.
The funds are built with flexibility so that if investors' situations change, such as coming into an inheritance, they will be allowed to exchange backward or forward from one Income Replacement Fund into another with a different time horizon and move forward with a new plan.
Secondly, what makes these funds unique is that they were built to be paired with a new free service from Fidelity called the Fidelity Smart Payment Program. The program helps investors and/or their financial advisers, calculate exactly what periodic payments investors should take from their fund accounts, so that at the end of the specific term (2016, 2028, etc.), all principal and earnings will have been withdrawn from the income replacement mutual fund.
Each year, on the account anniversary, Fidelity will recalculate the coming year's equal payments to investors and automatically set a payment plan into motion. Periodic payments could change from year to year depending upon account earnings. Investors are not locked into periodic payments and can take out additional assets as needed.
According to Fidelity, the first wave of the 77 million Baby Boomers that are expected to retire will make their transition into retirement beginning next year, when they begin turning 62. But they need realistic, low-cost solutions and flexibility, Fidelity executives stressed. The most aggressively invested of the 11 funds has a total expense ratio of 65 basis points, with the other funds sporting lower overall expense ratios.
Moreover, the funds were designed to be used as a "bridge" investment that can bridge the gap until a pension plan's retirement payments kicks in or Social Security payments start, said Boyce Greer, president of the fixed-income and asset allocation division of Fidelity. "These funds are building blocks," Greer said. "We believe there's nothing like them out in the market today."
Jon Skillman, president of Fidelity Investments Life Insurance, also announced a new variable annuity, dubbed the Fidelity Growth and Guaranteed Income VA. It features a guaranteed withdrawal benefit for the lifetime of the investor, or joint lives if spouses are included. The single payment annuity includes a choice of two portfolios: a fund-of-funds or a single actively managed portfolio, both of which include a 60% allocation to equities.
The VA includes an upside potential that allows investors to realize a higher guaranteed payment benefit through age 85 and locks in the rate so that even if the market declines payments won't. At age 85, payment levels remain steady.
The VA was designed expressly for investors transitioning into or already in retirement. Those under the age of 50 aren't even allowed to invest in the VA, Skillman noted. The goal is to provide a guaranteed source of income so that investors don't have to fear outliving their savings.
The VA has a 2% surrender fee for withdrawals above the guaranteed levels for five years, after which surrender fees cease. M&E expenses for the new Fidelity VA are 100 basis points for a single life, and 125 basis points for dual lives. According to Fidelity, that's 40% less than the average 205 basis points the average VA charges.
The new Income Replacement Funds are similar to Fidelity's current lineup of 11 Freedom Funds, which are lifecycle funds, the first of which Fidelity pioneered in October 1996. Those funds currently include 10 target dates in five-year installments (2000 through 2050), as well as a conservative income fund for those already retired.
But the new mutual funds have two advantages that the Freedom Funds lack. "We know the draw down amount and the end date for investors so Fidelity can design a glide path," Greer said. Additionally, while the last, most conservative Freedom Fund sports an asset allocation of 80% to fixed-income and 20% to equities, the most conservative of the new Fidelity Income Replacement Funds is 100% invested in money market funds to mitigate any risk of principal, Greer added.
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