Retirement Industry Adjusts For Today's Retirees

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With U.S. interest rates low but coiled to rise, and people in search of investment products with minimal fees, brokerages and financial advisers have been rethinking their strategies and product offerings to better address the needs of retirees.

Included among them are guaranteed investment contracts (GICs). While GICs have been around for a long time, they can be appealing when interest rates rise. Typically issued by life insurance companies, GICs guarantee the repayment of principal in addition to providing a fixed or floating interest rate.

GICs not only shield investors from losing principal in a rising rate environment -- unlike bonds sold before maturity -- but they also usually pay a slightly higher interest rate than a money-market fund, notes Northern Trust wealth planning and tax strategist Suzanne Shier.

The G in the name is a bit misleading. GICs are not guaranteed by the FDIC, and payments depend on the insurance company that issues a GIC staying in business.

ETFs In 401(k)s

Mutual funds have long been the mainstay of 401(k)s and other workplace-retirement plans, but recently some 401(k)s have been allowing trade in individual stocks. And now such firms as Charles Schwab ( SCHW ), TD Ameritrade ( AMTD ) andCapital One Financial 's ( COF ) ShareBuilder are bringing ETFs into the 401(k) fold.

Schwab Retirement Plan Services in February launched a full-service 401(k) program based on low-cost index ETFs. The company estimates that a 401(k) plan using these ETFs could achieve as much as 90% in cost savings vs. one using actively managed mutual funds, and up to 30% in savings vs. index mutual funds.

Expected to be offered to employers in the second half of this year, the platform will have about 80 ETFs across 25 asset categories.

"For the most part, ETFs are passively managed and as such, there is greater transparency about what they hold vs. a mutual fund, which, if it's active, you only get periodic updates about what management is doing," said Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ.

Investment diversification is a key element in protecting retirement portfolios from volatility in asset classes, market sectors and individual securities. But achieving suitable diversification requires assessing expected returns, life expectancy and tolerance for risk, tasks best handled by those with experience.

Target-Date Funds

Target-date mutual funds apply sophisticated portfolio management to funds focused on meeting the needs of investors as they prepare for and live through retirement. Managed to a set year in the future, such as 20 or 30 years out, these mutual funds are rebalanced regularly with that long-term investment horizon in view. Their exposure to volatile assets declines as investors move toward and through retirement.

Target-date fund assets have swollen to $650 billion from $45 billion at the end of 2004. The biggest one now is Vanguard Target Retirement 2025 , with $29.8 billion in assets.

Prudential IncomeFlex Target EasyPath Balanced Fund, a variable annuity insurance product, contains a feature that uses a high-water mark of your account balance in setting guaranteed annual income for the rest of your life.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: SCHW , AMTD , COF

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