Natixis' New Fund Offers Income, Liquidity During Retirement

America has been caught in the throes of a retirement savings shortfall for many years now, and the financial industry has put a great deal of emphasis on marketing annuities and other retirement savings vehicles to the public as a result.

The latest product to hit the marketplace is known as a retirement spending account, and this hybrid vehicle combines some of the features of annuities and mutual funds in an effort to provide a lasting stream of income to retirees. Offered by Natixis Global Asset Management, this new spending account is designed to provide a competitive payout with greater freedom and liquidity than annuities. (For related reading, see: ETFs vs. Mutual Funds: Choosing for Your Retirement.)

In a nutshell, the Natixis ASG retirement spending account is a single comprehensive portfolio vehicle that is designed to provide current income with limited volatility. This product has taken a step past managed income funds, which are offered by a few companies such as Vanguard and are designed to provide monthly income on an inflation-adjusted basis. These funds have been around for a few years now but have had few buyers thus far, and it is estimated that to date they have only collected a scant $3 billion or so in assets.

It also differs from target-date mutual funds that simply start with an aggressive asset mix and then reallocate to a more conservative portfolio as the target date approaches. The fund instead starts with a fairly conservative mix of investments that is then slowly moved into stocks over the next few years until about half of the portfolio is invested in equities; then the monies are systematically moved back into more conservative holdings as the retirees enter their final years when they do not need a hedge against inflation.

The majority of the fund’s market risk is taken during the middle third of the fund’s glide path in order to ensure that the fund’s assets are able to grow enough to provide sufficient income while minimizing portfolio risk at the two most vulnerable junctures in the client’s lifespan. The fund managers recognize the negative impact of a substantial market loss on a retiree’s portfolio at the beginning of the draw down phase, so a conservative allocation is taken at the beginning in order to minimize the impact of a substantial bear market. (For related reading, see: Are Target-Date Funds a Good Investment?)

Investors can choose to receive either a 4% or 5% payout each year from the portfolio, but unlike with an annuity, clients can sell this fund at any time and are not locked into an irrevocable payout. The asset allocation of this fund is determined by AlphaSimplex Group, an affiliate of Natixis, while Managed Portfolio Advisers handles the daily trading of securities and other portfolio management chores such as systematic withdrawals and tax management.

The portfolios themselves consist of mutual funds and ETFs offered by Natixis affiliates, and the target starting dates of the funds are for people who retired in 2000, 2005, 2010 and 2015. Edward Farrington, the executive v.p. of Retirement at Natixis Global Asset Management, says that these accounts seek to directly address the core financial needs and fears that many new retirees face today. “Retirement remains the number one investment priority for individual investors, and they worry about the costs associated with living longer, such as medical insurance, long-term care and inflation," he said. "Our new retirement spending accounts provide a contemporary approach to the age-old retirement challenge, how to match funding to current and future expenses that considers market volatility, longevity risk, taxes and other potential financial challenges associated with retirement.”

The retirement spending account is only available through financial advisors at this point, and there is a $100,000 minimum purchase. The fund also charges an annual fee of about 1%, and that will be assessed on top of any other fees that are charged by the advisor. This is partly due to the fund’s more active management style compared to managed-income fund like Vanguard’s, which charges less than half that amount.

This retirement spending account is a new type of vehicle that takes an experimental twist on annuities and target-date funds. It is designed to overcome the limitations that come with annuities, such as high back-end surrender charges and illiquidity for those who choose to annuitize their contracts in order to receive a guaranteed stream of income. This product offers professional management, diversification and total liquidity along with an inflation-adjusted stream of income. Time will tell how well this type of account performs and how popular it will become, as several other major financial firms will soon roll out their own respective versions of this product. American Funds is currently in the process of introducing three of them for conservative, moderate and aggressive investors. (For related reading, see: The 3 Best Vanguard Mutual Funds for your Roth IRA.)