(PUB) Morningstar FundInvestor - page 168

20
The Morningstar Category of retirement-income funds
contains several flavors of mutual funds worth con-
sideration. Still, unlike an annuity, these funds do not
offer any kind of guarantee, and investors should be
comfortable with the risks inherent in each strategy.
Target-Date Retirement Funds
Retirement-income funds are often the final landing
point of a target-date series’ glide path. These
are distinct vehicles that merge with the final dated
fund in the series, either at retirement or—as in
the case where the final dated fund continues to
roll down the equity allocation—after a specified
number of years. Not all series have a separate
retirement-income fund, though. For example, Alliance-
Bernstein continues to offer
2000
- and
2005
-
dated funds, which stay in the Target Date
2000
2020
category.
Similar to conservative-allocation funds, target-date
retirement funds do not have an explicit income goal
and are designed to provide broad exposure across
asset classes, allowing for income as well as appreci-
ation. These funds have an average trailing
12
-month
yield of
1
.
8%
, which is below the
2
.
1%
of the larger
retirement-income category norm. On average, target-
date retirement funds have a
28%
allocation to
stocks, although there is a wide range of allocations
within this subset. For example,
American Century
One Choice In Retirement
ARTAX
holds a rela-
tively aggressive
44%
allocation in stocks, while
Wells Fargo Advantage DJ Target Today
STWRX
has just
20%
invested in stocks. Target-date investors
should note the final equity allocation in their series’,
as it can dramatically affect the performance of their
investment throughout retirement.
Income-Replacement Funds
Perhaps best described as a reverse target-date fund,
an income-replacement fund will gradually return
your money plus any income and capital gains before
it liquidates in a designated year. Fidelity offers
14
such funds at two-year intervals that invest in a broad
array of Fidelity funds.
PIMCO
offers two options,
one maturing in
2019
and one in
2029
, which invest
almost entirely in Treasury Inflation-Protected Secu-
rities. While
PIMCO Real Income 2019
PCIAX
deliv-
ered a category-topping
12
-month yield of
16
.
52%
and
PIMCO Real Income 2029
POIAX
offered a
6
.
11%
yield as of February
2014
, they also suffered
a
3%
and
7%
loss, respectively, during the trailing
12
-month period as
TIPS
suffered from a recent
sell-off.
Managed-Payout Funds
Managed-payout funds provide monthly income with
room for investment growth. When the market slows
or drops, however, the fund can cut its payout or
return your capital. The
12
-month yield of each fund
provides an idea of just how much income these
funds have doled out. For example, Schwab offers
three managed-payout options, with distribution
targets ranging between
3%
and
6%
annually. The
series has had a tough time hitting those payout
hurdles given the low-interest-rate environment of
recent years, and the three funds have a
12
-month
yield ranging between
1
.
91%
and
2
.
01%
.
In contrast,
Vanguard Managed Payout
VPGDX
has
maintained a relatively aggressive profile, and its
hefty exposure to stocks (
54%
as of the end of
2013
)
along with a surging equity market in recent years
has helped it maintain a payout level close to its
target. (It has also had to return shareholder capital to
retain its targeted payout rate at times.) The fund’s
trailing three-year performance determines its payout
amount, and the firm recently cut the fund’s target
distribution to
4%
from
5%
in January
2014
, reflecting
more-modest return expectations for stocks and
bonds. At that time, the firm also consolidated its two
other managed-payout funds into this fund to create
a single fund.
œ
Contact Kathryn Spica at
Sifting Through Retirement-
Income Funds
Income Strategist
|
Kathryn Spica
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