A fund by any other nameDistribution funds also
may be referred to as:
- Managed income
funds
- Retirement income
funds
-
Income
replacement funds
-
Managed payout
funds
-
Retirement
distribution funds
There is no guarantee that a targeted- distribution fund will meet its stated objectives. The return and principal value of the funds fluctuates with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Questions to ask about
a distribution fund- How are monthly
payments determined?
-
Does the fund make
payments from
earnings only, or from
both earnings and
principal?
-
What is the proposed
withdrawal rate?
-
How much risk does
the fund take in trying
to reach its targeted
distribution rate?
-
What are the fund's
underlying
investments?
-
What is the fund's
current asset
allocation, and how
may that allocation
change over time?
Note: Past
performance is no guarantee of future results. Asset allocation
and diversification do not guarantee a profit or protect against investment loss. Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. Before investing in a distribution fund, carefully consider
its investment objectives, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing. | | Distribution Funds: Putting Income on Autopilot
As baby boomers retire,
they begin to focus less
on accumulating assets
and more on how those
assets can be converted
into an ongoing stream of
income. Distribution funds
are one way to simplify
that process. Distribution funds are
actively managed mutual funds that focus not on helping enhance
asset growth but on making regularly scheduled payments to
investors. Distribution funds were primarily designed to give
retirees an easier way to receive income. For example, early
retirees might use one to help provide income until they reach full
retirement age. They also can be used to complement a pension
or other income sources. How distribution funds workA distribution fund basically functions much like a systematic
withdrawal plan. Its annual payout (either a percentage of assets
or a specific dollar amount) is divided into equal payments
that are scheduled to be made at regular intervals (typically
monthly or quarterly). As with so-called lifestyle or lifecycle funds, distribution funds
typically are offered as part of a group. All funds in the group
use a similar investing methodology,
but each fund has a different
payout target or distribution rate.
For example, one fund in the
group might offer a 3% annual
payout. Another fund in the same
group might target a 4% payout,
and a third might aim for 6%. One size doesn't fit allEven though funds within a given
series are consistent in their approach
to income distribution,
methods used by various families
of distribution funds to generate
returns and calculate payments
vary widely. For example, one
series might differentiate its funds
based on the annual percentage
each one distributes. Another
group of funds might determine
annual income levels and asset
allocation based on how long
each fund's portfolio is intended
to last. The shorter a fund's time
horizon, the higher the targeted
annual payout. Some distribution funds are managed
so that all capital is exhausted
by the end of a designated
time period, generally getting
more conservative as that
end date gets closer. Others are
designed to help preserve capital and
make payouts primarily from
earnings; these typically have no
time frame attached.
Regardless
of how the targeted payout rate
is derived for a given fund series,
it's based on what is considered
a sustainable withdrawal rate
given the fund's objectives,
planned asset allocation, and time frame (if applicable). Also,
in some cases, the amount of the payout is adjusted to keep
pace with inflation. A distribution fund's method of providing its targeted income is
generally based on historical rates of return for various types
of investments in both good and bad markets. Each
fund's strategy is intended to help reduce the impact of market
fluctuations on its income payout. However, there is no guarantee
a fund's payout will remain the same from year to year. Also, it's important to remember that all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. A distribution fund is generally structured as a fund of funds,
meaning that it is comprised of other mutual funds. However,
some also include other types of investments. Distribution funds aren't annuitiesBecause of their focus on income, distribution funds are designed
to fill a role in retirement that is somewhat similar to
that of payments from an immediate annuity. However, there are some key differences. Perhaps the most important is that
distribution funds offer no guarantees of the payout levels they
offer; immediate annuities generally do (subject to the financial strength and claims-paying ability
of the annuity's issuer). Also, a mutual fund is not an insurance
contract, as an annuity is. And immediate annuities often are designed
to help ensure an income that lasts throughout an individual's
lifetime, and/or that of a spouse. Though an investor can
attempt to provide that with an appropriate distribution
fund, no fund can guarantee income for life. Advantages of distribution fundsA distribution fund can help simplify and streamline the process of
receiving ongoing income. You don't have to worry about constructing
that diversified portfolio yourself, shifting its asset
allocation over time, or rebalancing it periodically. Also, the
concept of a distribution fund may be easier to understand
than an insurance contract that has many riders and variables.
In addition, a targeted payout rate may make it easier to estimate
how long your savings will last than if you were to try to
manage your portfolio on your own. Distribution funds also offer a great deal of flexibility. Even
though you receive regularly scheduled payments, you can
withdraw additional amounts from your principal at any time.
That means you can adjust your annual retirement income
from year to year, or make withdrawals to take care of unexpected
costs. Investments that guarantee a regular income
stream typically restrict the use of your principal.
Because distribution funds were intended as low-cost alternatives
to annuities, expense ratios tend to be comparatively low. Tradeoffs with distribution fundsAs mentioned previously, a distribution fund may strive to provide
a certain level of income, but there are no guarantees that
it will do so. Depending on how a fund is structured
and managed,
a steep or prolonged market decline could affect the
amount of the scheduled payments from year to year, or how
long your investment will last. If you cannot afford either possibility,
a distribution fund may mean more uncertainty — either
long term or short term — than you're comfortable with. If you are willing and able to structure and administer a systematic
withdrawal program independently, you may be able to
replicate many of the advantages of a distribution fund with a
well-diversified portfolio. That would give you greater ability to
customize payouts to your
individual situation. For
example, you could shift
investments based on
what's happening in the
financial markets or your
own life, and manage your
tax situation from year to
year. Distribution funds are designed
for individuals who
plan to stay invested in a
given fund for an extended
period of time. If you're an
active trader or might withdraw
your money relatively
quickly, you may want to
think twice; in-and-out investing
will undercut the
very reason for choosing a
distribution fund. And be
aware that even though you
can withdraw amounts over
and above your scheduled
payments, those withdrawals
will reduce future earnings
that would have supported
distributions in later years. That could leave you vulnerable
to longevity risk — the possibility of outlasting your savings. You also may need to consider any projected distribution fund
payouts in the context of other retirement income concerns,
such as the tax consequences of those payouts, or required
minimum distributions from a qualified retirement plan or IRA. One of many choicesAs with most investment options, a distribution
fund may not fill all your retirement income needs. Don't
hesitate to seek guidance on whether one might be useful
for part of your portfolio, or for a specific purpose. |