While the target-date approach represents an improvement for many investors, the funds offer little help for another big concern: withdrawals. Studying shareholders in its retirement plans, Fidelity Investments found that the average participant was withdrawing assets too quickly -- taking out 9% of assets annually. According to academic research studies, investors who withdraw at that rate could exhaust their savings in a decade or two.
To provide an automatic approach, fund companies have introduced payout funds. These can send regular checks to retirees. For example, Russell LifePoints 2017 fund aims to pay out 7% of assets annually for 10 years.
The payout funds may prove helpful, but investors must be aware that the portfolios are invested in stocks and bonds. So fund prices fluctuate along with the markets, and there is no guarantee that the checks will arrive.
The payout funds appear relatively shaky compared to traditional pensions, which provide guaranteed income for life. But in an era when corporations must cut costs to survive, 401(k)s will continue replacing old-style pensions. Automatic features may help to ensure that current employees receive at least some income when they retire.
