Income for retirement with no guarantees

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With employer pension plans all but extinct, retirees seeking a predictable source of income after their paychecks come to a halt must face a whole new type of challenge.

The closest thing to getting a pension involves buying an immediate annuity, which offers guaranteed income for life in exchange for upfront cash. But annuities are pricey for the peace of mind, and then there’s the loss of liquidity and investment control.

Some financial firms offer annuity-like options within 401(k) plans, while others are rolling out new products that seek to provide lifetime income without the use of an annuity.

Call it the modern-day pension plan, minus the guarantee.

“A lot of retirement income products haven’t sold as well as anyone expected, so I think there are a lot of firms stepping back and taking another look at their products,” says Matt Schott, vice president of retirement income for Boston’s Financial Research Corp., a research firm focused on the investment and asset management industry.

Indeed, about 26 percent of asset managers surveyed by FRC in March said they were either building or improving upon products without guarantees, using asset allocation techniques that they believe increase the certainty of income payouts while keeping risk to capital at a minimum.

The annuity-free retirement income options described below are a sampling of what’s available or what’s coming soon to 401(k) plans or through financial advisers. They are either pure play asset management products, in which a firm actively manages a portfolio on the client’s behalf, or hybrids that employ active management plus an optional annuity for those who can’t sleep at night without the guarantee.

A target-date fund spinoff

This summer, Putnam Investments is launching a suite of income-oriented target-date funds designed to generate lifetime income by blending absolute return strategies that focus on wealth preservation with more conventional relative return — or benchmark-focused — mutual fund strategies.

The products, called the Putnam Retirement Income Fund Lifestyle 1, 2 and 3, allow financial advisers to customize risk levels and withdrawal rates to meet their clients’ changing needs during their drawdown phase. Two of the funds already exist — Lifestyle 1 is the new name of the Putnam RetirementReady Maturity fund, and Lifestyle 3 will be a new and improved version of the Putnam Income Strategies fund.

Like many other retirement income funds, these products are funds of funds. Lifestyle 1 is the most conservative, containing a combination of Putnam’s Absolute Return 100, 300 and 500 funds, an asset allocation fund and a money market fund. Putnam’s Absolute Return funds employ hedging strategies in their quest to manage market volatility and outperform inflation by different margins over three years or longer.

Lifestyle 2 and Lifestyle 3 contain somewhat more aggressive holdings than Lifestyle 1, including domestic and international stocks as well as convertible securities. These funds are only available through an adviser, though they will also be made available to 401(k) plans.

Monthly paychecks from 401(k) plans

Dimensional Fund Advisors also plans to launch an insurance-free pension solution later this year.

Dubbed Dimensional Managed DC, the product is designed to provide retirees with an inflation-protected income stream for life in the form of monthly checks during retirement.

Like a defined benefit pension plan, it manages investment decisions for plan participants.

According to the company, Dimensional Managed DC differs from other income solutions because it creates a customized plan for each employee to achieve pre-established goals by managing interest rate, market and inflation risks.

During retirement, the plan provides access to multiple payout options, including inflation-protected annuities.

Another new entrant offering solutions exclusively to the 401(k) market, New York-based investment advisory firm Financial Engines launched its own lifetime income option in January called Income+.

The plan is designed to provide employees steady monthly payouts during their early retirement years from their 401(k) account directly into their checking account, giving them more control of their money, and does not lock them into an investment or insurance product.

Plan participants can start and stop payouts from their 401(k) account at any time, and gain full access to their savings as needed.

Assets within the plan are managed with an income objective, using bonds to develop an income floor, equities and a lump sum of money set aside in fixed income that can be used to purchase an optional annuity outside of the plan.

Other retirement income alternatives

Consumers who purchase such products should be aware that investment-only retirement income products do not guarantee income for life, unless they purchase an optional annuity, says Larry Glazer, managing partner for Mayflower Advisors, a wealth management firm in Boston.

Moreover, he says, retirees can create the same type of income stream using existing strategies.

“There are many products out there that can help create income,” says Glazer, who directs some of his clients toward Manning and Napier’s Pro-Blend conservative target-date funds. “It’s not specifically a newly created product, but for many investors that’s an appropriate alternative to short-term bond funds or these new products, which still gives them a fighting chance of beating inflation,” he says.

Likewise, retirement planners who are 10 years away from retirement or more “would be well-served” with a traditional balanced portfolio that consists of 60 percent equities and 40 percent bonds, or an equity income product, like mutual funds or exchange-traded funds that strive for lower volatility than the overall market and a moderate dividend payout, he says.

As retirees increasingly rely on their own savings as a source of monthly income, it’s important that they consider the pros and cons of all the retirement income vehicles available to them, especially the newest products on the block.

“At the end of the day, clients really do want the guarantees and would like to have a pension, but the trend is clearly away from that so they’re always going to be looking for alternatives,” says Glazer. “We just need to be very careful about what alternatives we give them.”

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