Targeted-Distribution Fund

A Targeted-Distribution Fund is a mutual fund that distributes income and capital gains to fund participants, usually as income replacement for retired workers. Targeted-distribution funds have gained in popularity as the Baby Boom Generation has aged into retirement, and as employer-sponsored defined benefit pension plans disappear. Such plans are also sometimes known as Open-End Managed-Payout Funds.

Targeted-distribution funds come with a variety of features and structures. Some funds specify a monthly payout, while others offer a variable payment based on portfolio performance. Some funds will protect the principal investment, while others will deplete principal.

Unlike annuities, targeted-distribution funds do not contract payments, principal retention, or other plan structures, and are as vulnerable to the whims of the market as other investment instruments. While any given fund may list a specific principal retention strategy or inflation-adjusted payout, if the portfolio performance does not result in adequate returns, the fund managers are usually not obligated to make payouts or protect principal investments, making these instruments an unreliable option for many investors. On the other hand, some investors may find managed payout plans attractive because of the variable payout option, which has the potential to compensate for inflation over time and, in some cases, result in an increased overall payout.

Targeted-Distribution Plans are among the many instruments invented in recent years to replace private-sector pensions as retirement security for American workers.

The U.S. private sector began to shift away from offering defined benefit pensions in the 1970s, with workers who do invest in retirement plans investing in 401(k) plans and IRAs. Many analysts have long anticipated a crisis in retirement in coming years, especially as underfunded defined benefit pensions threaten to cut benefits to pensioners.  

Defined benefit plans were once dominant in the workforce. In 1975, the U.S. Department of Labor showed that 98 percent of public-sector workers and 88 percent of private-sector workers were covered under defined benefit plans. By 2005, these figures had dropped precipitously: while 92 percent of public workers were covered under defined benefit pensions, only 33 percent of private-sector employees retained coverage.

Only 18 percent of private-sector workers were covered by defined benefit pensions 2012, according to a Bureau of Labor Statistics report. In a 2015 study released by the Schwartz Center for Economic Policy Analysis at the New School, 68 percent of working age people reported they did not participate in an employer-sponsored retirement plan.

As these trends continue, analysts continue to speculate on solutions, while workers are encouraged to seek and invest in independent retirement plans which can fit their own budget requirements and continued standard of living needs.