Taking dead-aim at Middle America, Allstate Corp. has added guaranteed lifetime withdrawal benefits to its target funds.

The product, "Guaranteed Lifetime Income," follows a number of guaranteed minimum lifetime withdrawal benefits linked to managed accounts aimed at the high-net-worth.

The initial investment in Allstate's ClearTarget Retirement Funds, required to obtain the benefit, is only $2,500. By contrast, Phoenix Life, which has teamed up with Lockwood Securities, requires a $250,000 minimum investment in a similar lifetime benefit attached to managed accounts. Genworth Life and Annuity Insurance Co. offer the benefit with managed accounts targeting the high-net-worth.

Allstate's product is available in all states, according to Jim Hohmann, president and CEO of Allstate Financial. The insurer's goal is to provide an easy-to-understand retirement product for unsophisticated middle-income consumers. The target funds can be in a taxable account or tax-deferred retirement savings account.

"Recent national studies show record low U.S. retirement savings, anxiety over market downturns eroding retirement savings and frustration about complex financial information that creates greater barriers to investing in retirement savings," Hohmann said. "Our customers are hardworking Americans with enormous day-to-day demands on their pocketbooks and on their time. They tell us they are looking for simple retirement savings solutions that provide flexibility and access to their money."

Charles "Chip" Roame, a principal with Tiburon Strategic Advisors, Tiburon, Calif., sees enormous potential for target-date funds tied to lifetime withdrawal benefits in the bank, independent advisor and wirehouse channels.

"This has humongous potential," he said. "It's a great idea because people are looking for low-cost protection, but don't want to buy a variable annuity due to high fees and surrender charges."

The Allstate ClearTarget Retirement Funds automatically rebalance as consumers approach retirement. The fund manager gradually moves the investment mix from a more aggressive portfolio into a more conservative blend of stocks, bonds and short-term investments.

The guaranteed lifetime withdrawal benefit is available on Allstate's 2005, 2010 and 2015 target-date funds. Insurance charges range from 70 basis points to 125 basis points, depending on whether the policyholder selects a step-up or roll-up benefit base. Overall, there is a 2% cap on the insurance charge.

The benefit can be activated starting at age 60. The guaranteed payout, ranging from 4.5% to 7%, based on the accountholder's age and spousal option, kicks in after the fund balance is depleted.

If Allstate, Phoenix Life and Genworth products are big hits, Chris Lyon, a partner with Rocation, a Norwalk Conn.-based investment consulting firm, expects investment and insurance companies to tack on guaranteed withdrawal benefits to target-date funds in IRAs, SEPs and 401(k) defined contribution plans.

"Over time, you will see more assets go into target retirement funds with guaranteed withdrawal benefits as plan sponsors get more data on how employees are using the funds," Lyon said.

Others are less certain this type of product will be popular.

Joseph Flaherty, manager of the MFS 4 Lifetime Funds, decided against adding the guaranteed minimum withdrawal benefit to target-date retirement funds because he manages the target funds more aggressively than similar funds during the accumulation stage. The guaranteed minimum withdrawal benefit fees would dramatically reduce a fund's returns during the accumulation stage. MFS's target funds are designed to preserve and build capital by the time the individual is ready to take systematic retirement account withdrawals.

"It is too costly based on the investment objectives of our funds," he said. "But investors tend to sell their fund when it hits its target date. Adding a guaranteed lifetime withdrawal benefit is a way to stop redemptions."

There also are questions about how the income from this type of hybrid product is taxed. Unless the target funds are in a tax-deferred retirement savings account, investors pay tax on dividends, capital gains and/or ordinary income when they withdraw. But when the account value is depleted, the annuity payments kick in and are taxed as ordinary income.

Meanwhile, the tax consequences of guaranteed withdrawal benefits at this writing had not yet been addressed by the Internal Revenue Service. So the IRS could reach a different conclusion.

Tax attorneys who specialize in insurance and estate planning reported the IRS is reviewing the issue.

"There are a whole bunch of products the IRS has not ruled on," said Leonard Witman, a Florham Park, N.J.-based tax attorney and adjunct law professor at Rutgers University. "The insurance companies are taking a conservative stance toward taxation. If clients need a guaranteed stream of income, I would look at this as an investment option. The tax treatment would not be my overriding concern. It would be the product that paid the best income guarantee at the lowest cost."

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