Fidelity’s newest portfolios aim at retiring boomer market

By Donna Glasgow | April 27 2008 03:10PM

With the launch of their newest category of portfolio funds, Fidelity Investments Canada has positioned itself to take a slice of the enormous baby boomer retirement income market.

Launched in January, Fidelity Income Replacement Portfolios offer a selection of 11 portfolios designed to provide retirees with income over various time horizons ranging from 10 to 30 years. The portfolios convert investor’s retirement assets into a stream of monthly cash flow over the selected period.

Darren Farkas, Fidelity’s vice-president, product solutions, says this solution represents a first in the market for investors by providing professionally managed asset allocation with a professional withdrawal strategy. Traditionally, mutual fund companies have been in the asset accumulation business, but this new product enables Fidelity to get in on the "big opportunity" as boomers shift their assets from accumulation products to income as they hit retirement.Is this new product going head to head with the new guaranteed minimum withdrawal benefit (GMWB) products offered by insurers such as Manulife Financial and Sun Life Financial?

Not according to Mr. Farkas. He says that Fidelity’s portfolios, which provide a non-guaranteed source of retirement income, are intended to be a complement to other guaranteed income offered by GMWBs, annuities or government pension income.

The Fidelity Income Replacement Portfolios are the third portfolio category from Fidelity Canada. The company also offers a wrap product, Fidelity Managed Portfolios and a lifecycle solution, Fidelity ClearPath Retirement Portfolios.

Mr. Farkas calls this new income portfolio "the next generation" in Fidelity’s spectrum of portfolio products. Similar to lifecycle portfolios, the income replacement product has an asset mix that grows more conservative over time. This mix includes equity exposure to allow for capital growth and an increasing payment rate over time to keep pace with, or beat inflation – a key risk to retirement income, he adds.

But why choose a non-guaranteed product when other solutions such as a GMWB will provide a guaranteed income stream? Mr. Farkas says he thinks GMWBs are a great product that everyone should consider, but a non-guaranteed product still has a place in a well planned income strategy.

"The way I think about it is that investors have been taught to diversify as they save. I believe that retirees should diversify their sources of income."

He says that Fidelity’s product is a more cost-effective alternative to some other solutions, such as GMWBs, which the company estimates at 75 to 100 basis points more expensive than its income portfolio product.

By including some equity exposure, the solution offers retirees a potentially higher rate of return over GICs, which in the current low interest environment may not be able to generate an adequate income stream, especially for those many boomers who haven’t put enough savings aside. The product also allows for full access to the client’s capital should an unexpected need arise.

Mr. Farkas adds that this product can be used as part of an overall retirement income plan in many ways, such as a bridging strategy to supplement income until other sources kick in like Canada or Quebec Pension Plan benefits. Or, it could be used as a supplement to boost discretionary income during the active, earlier years of retirement. It might also be used to supplement part-time work earnings during retirement, or as a tax-efficient source of income for non-registered assets.

Mr. Farkas adds that he believes that the income replacement solutions market is about to see rapid expansion with many more companies, from the mutual fund and insurance industries, launching their own products to address the wealth shift needs of boomers.

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