As fund companies experiment with retirement income solutions, financial advisers and investors are worried about products that are designed to leave participants with a zero balance.
Last fall,
Fidelity Investments Institutional Services Co. Inc. of Boston was the first to introduce such a product — Fidelity Advisor Income Re-placement Funds — which draws down to zero once the fund reaches a specific target date.
Since then, Charles Schwab & Co. Inc. of San Francisco and
The Vanguard Group Inc. of Malvern, Pa., have launched similar funds, though theirs preserve the client's principal.
Boston-based John Hancock Financial Services Inc. and Russell Investments of Ta-coma, Wash., are expected to launch similar funds soon.
So far, the funds that allow participants to keep their principal are much larger than Fidelity's funds, which have attracted $38.1 million in assets since last fall.
Schwab, which launched its funds March 11, has assets of more than $54 million, while Vanguard's products, which have been available for two weeks, have $113 million.
Clients don't like the idea of putting money into an account that eventually will be worthless, advisers say.
Beth Blecker, chief executive of Eastern Planning Inc. in Nanuet, N.Y., said she isn't attracted to any of the new income funds and particularly worries about asset depletion.
"You'd have to say to your client, 'Tell me the day you're dying, and I can make a financial plan for you. If you live two more days, I'm sorry, but you can't eat,'" Ms. Blecker said.
Recognizing this concern, it is quite possible that the fund companies that closely watched Fidelity's fund launch tweaked their products to make them more appealing, said Tom Modestino, a senior analyst at Boston-based Cerulli Associates Inc., referring to Schwab's and Vanguard's offerings.
"The versions keep getting better, and the clarity and transparency moves along that spectrum," he said.
Fidelity officials said that they are pleased with the performance of the funds but think that they have had to overcome several public misperceptions.
"I think the biggest challenge is helping investors understand that this is not a single-fund solution," said Dan Beckman, vice president of product management.
Schwab's strategy is to provide a solution that investors can use for their entire portfolio, said Patrick Water, director of retirement investment products for
Charles Schwab Investment Management. He declined to comment on Fidelity's approach.
"The products that are the most appealing are the ones that have the most in assets," Mr. Water said.
Schwab's new funds include the Moderate Payout Fund, which offers an annual target income payout of 3% to 4% and has the greatest exposure to equities, about 60%; the Enhanced Payout Fund, which has a target annual income payout of 4% to 5% and is 75% fixed income; and the Maximum Payout Fund, which offers the highest level of income potential, with a payout of 5% to 6% and is about 90% invested in fixed income.
All three funds are intended to preserve the principal of the portfolio while providing investors with a stream of steady monthly income.
Fidelity's payout funds are a series of funds of funds with horizon dates in two-year increments, from 2016 to 2042. Stock exposure in-creases as horizons extend, and payouts vary with horizon date and investment performance.
Vanguard's three payout funds have annual payout rates of 3%, 5% and 7%.
It is possible that advisers simply need more time before considering Fidelity's funds, Mr. Beckman said.
It took several months for Brad Levin, president of Legacy Wealth Partners, to consider using them. "When I first heard about these products I was really negative on them," said Mr. Levin, whose Encino, Calif., firm manages $120 million in assets.
Now, after looking at all the funds more closely, Mr. Levin said, he can see how he might be able to use Fidelity's approach as a component of a client's retirement. He said he might consider using the Fidelity strategy to cover income for a client for 10 years while putting the rest of the client's assets in other investments.
It may still be too early for other advisers, said Stephen Mitchell, director of investor education and planning for New York-based Merrill Lynch & Co. Inc.'s retirement group, which is based in Pennington, N.J.
"The hurdle investors need to get over is how these fit into the overall plan," he said. "Our perspective is, you really need a qualified adviser to think through all of these solutions and get that plan in place."
E-mail Lisa Shidler at [email protected].
