Retirement Income: Advisers still poke holes in retirement income products

Even as the financial services industry scurries to provide advisers with better retirement income vehicles, advisers continue to criticize the new products. Insurance companies were first to the table, offering annuities with guarantees, but many financial advisers still think they are too expensive and complicated. "Most of the retirement income products are variable annuities, and someone has sprayed perfume on them," said G.M. "Buz" Livingston II, a certified financial planner with Livingston Financial Planning Inc. in Santa Rosa Beach, Fla. His firm mostly works with clients on an hourly basis and doesn't manage many assets. "The reality is that all of these products are just very expensive," Mr. Livingston said. "Costs are the only thing you can control as a planner." In an effort to compete with the insurance companies, new mutual fund products strive to be less costly and easier to understand than insurance products, but many advisers think the new funds are too simplistic. These products work by setting up targeted income payout amounts that can be as little as 3% or 4% annually in more risky funds and as much as 6% or 7% in more conservative funds. In addition, they don't guarantee income. These funds are new and are considered an extension of target date funds, but they are used to withdraw money once a person has accumulated wealth. Target date funds are used while individuals are accumulating wealth. In November, Boston-based Fidelity Investments Institutional Services Co. was the first to introduce this type of fund with the Fidelity Advisor Income Replacement Funds. Now Russell Investment Group, based in Tacoma, Wash., and The Vanguard Group, based in Malvern, Pa., await the approval of the Securities and Exchange Commission to introduce similar products soon. This month, San Francisco-based Charles Schwab & Co. Inc. also introduced a similar type of mutual fund, the Schwab Monthly Income Funds. They comprise three funds, each with a different annual payout target to help investors plan for their income needs. These products are the first of their kind in the retirement arena and will likely change in coming years, said Dan Beckman, a Fidelity Investments vice president who oversees the Advisor Income Replacement Funds. "The need is great in the marketplace," Mr. Beckman said. "We've got our first product offering, and I'm sure it's not the last product offering." Fidelity manages $1.5 trillion. However, Mr. Livingston contends that even though these products are simple, "they really don't work for everyone." Another problem with these products is that they don't consider risks such as longevity, health-care expenses and lifestyle changes, according to Laura Varas, a research partner with Financial Research Corp. of Boston. She pointed to research conducted by FRC in November which showed that fewer than 20% of firms said they had a methodology that took these risks into consideration when creating retirement income products. In April, Russell intends to unveil three mutual funds with the objective of providing a steady payout on an annual basis while preserving capital, said Ryan Parker, director of products for its U.S. private-client-services group. Russell manages about $225 billion. It has two funds with a 10-year horizon; the third has a 20-year horizon. "We think simplicity is really important in helping advisers solve the retirement income equation," Mr. Parker said. Vanguard's proposed product is also designed to offer systematic payouts in retirement. The company thinks that simplicity is key to a product's acceptance among advisers, said John Ameriks, a senior investment analyst with Vanguard.
"A lot of investors like to have a place to start," he said. "That's really the way we view it," Mr. Ameriks said. "[These products] provide a basic platform for people who are looking for systematic payouts in retirement." This type of fund is unique for mutual fund companies, said Pat Waters, director of retirement investment products for Charles Schwab Investment Management in San Francisco. The firm has just under $250 billion under management. "We anticipate an appetite in the retail world and adviser community for these kinds of products," he said. But, again, while these products may be simpler than annuities, they may be too simple, said Paul Burkemper, founder and president of Burkemper Group, a St. Louis financial advisory firm that manages about $120 million. "The mutual fund solutions seem to be generic and not as customizable as other solutions. I haven't seen anything that's caught my eye," he said. "I just want to make sure when people come to see me that I'm not just plugging them into a one-size-fits-all solution," Mr. Burkemper said. Srinivas Reddy, vice president of retirement income strategies for Windsor, Conn.-based ING U.S. Wealth Management, agrees that the new mutual fund products lack the customization that many advisers want for their clients. "Mutual funds have traditionally been an accumulation vehicle. Generating income is not in their DNA," Mr. Reddy said. "All of these [mutual fund] products don't have an underlying guarantee," he said. ING U.S. Wealth Management is a division of ING U.S. Financial Services, which is based in Atlanta and has $140 billion under management. Greg Salsbury, executive vice president at Jackson National Life Distributors LLC in Denver, also doesn't think that simple solutions are necessarily the best answer to developing retirement income products. "Yes, you can apply simplistic solutions, but if you use simplicity, typically you'll sacrifice effectiveness," he said. The cost of the new fund products is also an issue with advisers. While mutual fund leaders maintain that their products are cheaper than the insurance options, both products can be too expensive, said Mark Kollar, a registered representatives and founder of Kollar Financial Strategies, which is based in Rosemont, Ill., and manages about $25 million. He has been very disappointed with the cost of some of the new products. "There are so many [products] out there that just cost so much money," Mr. Kollar said. But some advisers think that retirement income products will continue to get better, said Teresa Epperson, a partner with Mercatus Partners LLC, a research firm in Boston. "We'll continue to see more thought leadership around how to broaden the framework that's been used to incorporate the retirement risks," she said.
What will likely continue to happen is that insurance companies and asset managers will craft products that will come closer to appeasing advisers, said Philipp Hensler of Chicago-based DWS Scudder, the U.S. retail division of the asset management subsidiary of Deutsche Bank AG of Frankfurt, Germany. DWS Scudder manages about $83 billion. "What you see with any new products are the early adopters," Mr. Hensler said. "Then, you have the broad majority that will follow suit once the products have been proven to work." E-mail Lisa Shidler at lshidler@investmentnews.com.