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
) andCapital One Financial 's (
) 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
Expected to be offered to employers in the second half of this
year, the platform will have about 80 ETFs across 25 asset
"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
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.