Income-replacing funds offer both comfort, risks

NEW YORK — Investors who use target-date funds to put investments on cruise control until retirement face a question: How will I manage my money so it holds out once I've stopped working?

Fidelity Investments, the nation's largest fund manager, this month rolled out mutual funds designed to provide enough of a return to last through retirement.

Like target-date funds, which automatically shift investments into more conservative areas such as bonds as retirement year nears, the income-replacement funds are designed to take the guesswork out of asset allocation. But they are aimed at retirees.

Investors estimate how long they will need to have money coming in for their post-work years and allow the fund's overseers to do the rest.

"These funds are designed to function like an endowment, to provide a regular stream of cash distribution," said Ellen Rinaldi, principal and head of investment counseling at Vanguard, which hopes to offer the funds.

With many relying on 401(k) accounts and similar plans instead of pensions, some welcome the comfort of a check that arrives regularly.

But while the funds can be set up to operate like an annuity and pay out a steady distribution every month, they make no promises. While annuities carry higher expense ratios, their payments are guaranteed. With the new products, if the stock or bond market takes a hit, a fund might have to dip into an investors' principal to come up with the monthly payment.

For that reason, the expectations for the payouts are kept modest.

The funds are designed to let investors receive more money early on in retirement, when they might be more active, but still leave enough to make payouts in future years.