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Mutual fund companies positioning themselves in retirement income market

By Donna Glasgow | May 12 2010 04:04PM

As the population ages, mutual fund companies are looking at how they can turn the assets that Canadians have accumulated with them during their earning years into retirement income.

Dennis Yanchus, Manager of Statistics with The Investment Funds Institute of Canada, explains that assets invested in mutual funds found in Canadians' RRSPs and defined contribution savings plans will eventually need to be converted into a retirement income stream. "You're going to see more income option fund-of-funds products. It will be an evolution toward pension-style products." Similar to the way pensions work, these funds will offer accumulation and de-accumulation rolled up into one product, he adds.

The trend began to emerge in the past two years as the first fund products geared toward providing income replacement came onto the market, says Mr. Yanchus.

Fidelity Investment Funds Canada was the first fund company to introduce such a solution to the Canadian market with Fidelity Income Replacement Portfolios launched in early 2008. These portfolios have so far attracted about $20 million in investments, says Darren Farkas, Vice President, product solutions who says that in being the first to launch such a solution, Fidelity wasn't expecting "a home run out of the gate," especially given the market conditions at the time.

He adds that with any new product, it takes time for advisors and clients to get comfortable. But he is confident that the product will develop a significant market. "This is a long term strategic product... With the baby boomers retiring, the potential is incredible for these products."

He describes these portfolios as the "natural extension" of the company's ClearPath life cycle portfolios. The money can be accumulated in the ClearPath funds and then moved into the income replacement portfolios when the client reaches retirement.

Does he see these products as competitors of the insurance industry's highly popular guaranteed minimum withdrawal benefit products? Mr. Farkas says "We don't view these as a competitor to GMWB products. We view them as a complement." He adds that the mutual fund company's products could be included with GMWBs as part of a strategy to establish diverse sources of retirement income.

Access to capital

He suggests that GMWBs, which provide a guaranteed income stream, could be used to cover necessary expenses, whereas Fidelity's income replacement product could be used for discretionary expenses.

Unlike a GMWB, the money invested in these portfolios is not locked in which makes them flexible if an unexpected expense arises, adds Chris Pepper, Fidelity's Director, corporate affairs.

Fees are lower with these products than a GMWB Mr. Farkas notes. They do not include an insurance cost.

But while GMWB payouts are guaranteed, Fidelity's product payouts are adjusted on a yearly basis. They could be lowered in a down market.

Invesco Trimark also has a similar offering. It launched its Retirement Payout Portfolios product in June 2008. "Competitor or complementary to the GMWB? I think you could make a case for both," comments Scott Newman, Vice President of alternative strategies.

He says both product types help to manage portfolio volatility in different ways. A GMWB offloads the downside risk of investing to the insurer. Another way to manage volatility is through broad diversification, which is the approach Invesco Trimark has taken with its Retirement Payout Portfolios and the same approach that institutional investors take to manage pension funds.

Mr. Newman adds that pension plans are managed with two major issues in mind: current cash flow and future growth needs of retirees 15 to 20 years down the road. He says that the Retirement Payout Portfolios are also structured to fill both the needs. The portfolios have fixed end dates and the asset mix is adjusted over the years. In particular, the equity content of the portfolios declines steeply and the fixed income component is increased toward the last five years.

Mr. Newman adds that these portfolios could be used as a core investment in a retirement income plan, or as a method of bridging the income gap that might exist if someone takes early retirement and their pension doesn't kick in until age 65.

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