Mutual Funds

Is quest for income old-fashioned alchemy or magic elixir?

BOSTON — The Charles Schwab Corp., T. Rowe Price Group Inc. and OppenheimerFunds Inc. are among firms exploring ways to add a guarantee to life cycle funds — providing investors with an income stream in retirement.

BOSTON — The Charles Schwab Corp., T. Rowe Price Group Inc. and OppenheimerFunds Inc. are among firms exploring ways to add a guarantee to life cycle funds — providing investors with an income stream in retirement.
Life cycle, or target date, funds grow more conservative and produce more income as the so-called target date approaches. Target date fund assets totaled $133 billion as of March 31, up from $70.2 billion at the end of 2005, according to Boston-based Financial Research Corp.
A “check the box” solution for investors in their retirement years is on the drawing board at San Francisco-based Schwab, said John Sturiale, who manages the Schwab Managed Retirement Trust Funds, which include five target date funds whose assets total about $2 billion.
“We’re looking at something that we can hook on to our target funds that would be more of a guarantee [for investors in] their retirement years,” he said last month at Capitola, Calif.-based Financial Research Associates LLC’s Target Date/Lifecycle Funds Summit in Cambridge, Mass.
The product would involve some sort of guarantee — either an annuity or a fixed-income product — that would assure investors a steady stream of income during retirement, Mr. Sturiale said.
Golden age
The U.S. Census Bureau projects that 86.7 million people — or 21% of the U.S. population — will be at least 65 years old by the year 2050. Given those demographics, firms are evaluating ways to generate retirement income whether they provide life cycle funds or not, said Jerome Clark, a portfolio manager at Baltimore-based T. Rowe Price Group.
“Everyone is looking at retirement income, everyone is looking at some type of guarantee used in different ways and really doing some serious investigation into that,” said Mr. Clark, who also spoke at the conference.
In late 2006 or early 2007, a “tipping point” was reached in terms of how plan sponsors viewed target date funds, helped in part by The Pension Protection Act of 2006, he said.
“There’s been a shift in the plan sponsor mentality,” said Mr. Clark, who manages the 12 T. Rowe Price Retirement Funds, which have assets under management of more than $21 billion. “The mentality has shifted from, ‘This product is part of my assets,’ to, ‘This product is the majority of my assets.’ That’s how they’re thinking.”
Plan sponsors will continue to demand more from the product and its providers, Mr. Clark said.
“And that’s something we all have to be thinking about,” he said.
Whether potentially annuity-related guarantees would be good for life cycle fund investors remains to be seen, said Greg Carlson, a mutual fund analyst at Chicago-based Morningstar Inc.
“The devil is in the details,” he said. “A lot of annuities have been expensive — I don’t want to paint them all with the same broad brush — but a lot of them have been expensive.”
Mr. Sturiale also expressed some concerns about annuities in a follow-up interview last week.
“They can be expensive, there are lockup periods with them, and they can have more restrictions than what I may be comfortable with in this sort of a product,” he said.
Will the loot last?
Concern that people will outlive their money has led some mutual fund firms to increase the equity allocation of their target date funds, Mr. Carlson said. “More [target date] funds have come out recently, and they’ve kind of gone along with that kind of thinking,” he said.
That includes the Oppenheimer LifeCycle Funds, four funds of funds launched by New York-based OppenheimerFunds in January. They offer greater overall equity exposure than most target date products, and they don’t reach their most conservative allocation until well past the target date, the company said.
“We are also exploring different ways to incorporate different elements of guarantees within an accumulation phase during a savings program, as well as into the spend-down period,” Kathleen Beichert, senior vice president and director of strategic retirement programs at OppenheimerFunds, said in an interview last month. “It’s probably a little premature to talk about it today.”
It remains to be seen whether OppenheimerFunds, a unit of MassMutual Financial Group, of Springfield, and other firms that are subsidiaries of insurance companies, have an advantage in developing these products.
“But again, we are an asset management organization, and we are driven by what’s really best for our clients, for our shareholders and for our financial advisers,” Ms. Beichert said. “And so we start with that first and foremost.”