Fidelity launches funds that can make RMDs for aging baby boomers

The managed payout funds have an optional feature that automatically calculates and distributes an investor's RMD from the account

Jun 12, 2017 @ 2:25 pm

By Greg Iacurci

Fidelity Investments is hoping to rouse interest in an otherwise sleepy market for managed-payout funds by launching funds that can make required minimum distributions for investors, at a time when the first baby boomers have just started reaching RMD age.

Managed-payout funds, which generally aim to provide investors with regular monthly payments (which aren't guaranteed like annuity payments) have been around since 2007, when Fidelity first launched a version. Others such as Vanguard Group, American Funds, Charles Schwab, Voya Financial and Franklin Templeton Investments joined the fray in the interim, but haven't seen much uptake.

Managed-payout funds as a whole have less than $5 billion in assets, said Jeff Holt, multi-asset analyst at Morningstar Inc.

That's measly when compared with the roughly $900 billion in target-date mutual funds, which are similar to managed-payout funds in that they have an associated target date. But target-date funds are focused on accumulation and are not income-oriented like managed-payout funds.

"Retirement income is a hot topic for a lot of these large asset managers, so it has a lot of attention," Mr. Holt said. "You have asset managers not giving up but revisiting that space. And this is Fidelity's next approach in how to do it."

Fidelity's new funds, the Simplicity RMD Funds, are meant for investors who are close to age 70½, said Andrew Dierdorf, co-portfolio manager of the funds. That's the age at which retirees have to start taking required distributions from their retirement accounts.

The asset-allocation funds, which mix equity, fixed-income and short-term Fidelity mutual funds, act like a typical target-date fund by getting more conservative as an investor ages. The fund vintages signify when an investor is expected to turn 70 years old. They have an optional feature that automatically calculates and distributes an investor's RMD from the account.

July 1, 2016 marked the date in which the earliest baby boomers turned 70½, and roughly 10,000 boomers will follow per day over the next two decades.

"We're just at that first full wave of baby boomers," said Mr. Dierdorf. "I think as individuals get more and more familiar with the complexities of trying to do it themselves, the need for simplicity is something that will become more prominent."

Taking RMDs can be a complex process, depending on an investor's financial situation and the number of retirement accounts from which an investor has to take distributions.

Mr. Holt said other managed-payout funds haven't been explicitly tailored to RMDs. Others pay out a certain percentage of income to investors. Vanguard Managed Payout tried to pay a 4% annual distribution, for example.

For the strategy to make the most sense, Mr. Holt said investors would likely have to put all or the bulk of their retirement assets into such a strategy, which some may be reluctant to do.

"It seems like the investor would have to be pretty confident in the approach and design behind it," he said.

Nicole Goodnow, a Fidelity spokeswoman, said the funds are mainly for more self-directed investors or advisers who know which portion of an investor's portfolio would benefit from the strategy.


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