Fidelity offering addresses draw-down

Fidelity Investments Canada has launched the country’s first major mutual fund–based retirement income product to challenge the insurance industry’s guaranteed minimum withdrawal products.

With boomers racing toward retirement, financial firms have been devoting their resources to developing an investment portfolio that provides a retirement income while growing assets quickly enough to mitigate the risk of clients outliving their money.

The insurance industry has dominated this product market with blockbuster sales for products like Manulife’s IncomePlus and Sun Life/CI’s Sunwise Elite Plus. Compared to traditional retirement products like bonds and fixed-income mutual funds, these products can be relatively expensive to buy and liquidate.

Fidelity’s Income Replacement Portfolios, which were launched on Wednesday, will be a cheaper and more flexible way for investors to create a retirement income and investment growth.

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The program consists of a flexible suite of 11 portfolios similar to life cycle products with investment horizons ranging from 10 to 30 years. Currently, the horizon dates last from 2017 to 2037.

Based on the time horizon, Fidelity sets an annual target payout that increases proportionately to the net asset value of the portfolio each year to account for inflation. The money that is not withdrawn continues to be allocated to a number of existing Fidelity funds. Fidelity says investors maintain full access to their capital and can turn payments on and off as their retirement income needs change.

Darren Farkas, vice-president of product solutions, says that for the 30-year time horizon, the asset allocation looks like a standard balanced fund, with 60% allocated to equities and 40% in fixed income. As the investment matures, it becomes more conservative so that by the final year, only 3% of the portfolio is allocated toward equities.

The new Fidelity product has been on the market in the U.S. since the fall of 2007, and has chalked up strong sales.

“We are excited that we can follow so closely with the launch in Canada and bring this new product solution to Canadian investors so quickly,” Farkas says. “There have been other options in the retirement income market launched in the past such as bonds, GICs and the GMWB products. We are offering another alternative to investors and advisors.”

Fidelity is not positioning the portfolios to be a direct alternative to the insured guaranteed investments though. Part of the reason it can offer a lower cost is because the investment’s principal isn’t guaranteed. Initially, the portfolios have a similar risk profile to that of a balanced mutual fund.

Farkas suggests considering the portfolios as a retirement income alternative to cover discretionary expenses in retirement, which Fidelity estimates represent about 20% of a retiree’s expenses. To cover essential expenses, Fidelity recommends retirees have more secure sources of income, such as government benefits, private pensions and even GMWBs.

“I would be a little bit cautious of calling it a take-away game [from the insurers]. Both of these products have a place in your overall plan,” he says. “But [GMWB products] may not be as cost-efficient as these portfolios are, so there is certainly an opportunity there.”

Farkas expects the MERs on the portfolios to vary, ranging from 2.10% to 2.30% based on the equity exposure within the portfolios. He says this is about 75 to 100 basis points lower than the GMWB products.

“Also, versus annuities, these portfolios give you more flexibility with access to the investment all the time,” Farkas says. “When people move into retirement, they never know what’s going to happen. Ten or 15 years down the road, you may have unexpected expenses for things like health care. You need access to a portion of your retirement savings and a full income, and these portfolios certainly give you full access throughout.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(01/09/08)

Mark Noble