Head: Trying to Manage Retirement Risk with a Flexible Fixed Income Product

The pre-retiree client between ages 55 and 64 is spooked, a huge money manager said today.

That’s because he or she doesn’t know if there will be enough income from the typical defined contribution plan. Clients also wonder when and how to tie up most of their assets in an annuity. He or she will receive Social Security and defined contribution assets, but still guesses exactly how much income they will provide on an annual basis and if it will be enough to fund a comfortable retirement.

“Understanding what a lump sum savings provides in estimated retirement income is difficult,” said Chip Castille, head of BlackRock’s defined contribution and retirement group.

Clients need flexible, liquid retirement products with predictable income to reach their retirement goals. So money manager BlackRock, which has some $4.3 trillion in assets under management, is introducing a group of bond funds and indexes. The CoRI bond funds, it says, will answer the frequent questions of whether someone has enough for retirement now or in a year or two, allowing investors and advisors to quantify if retirement plans are on track.

The CoRI retirement index funds, which were discussed at a news conference today, invest primarily in corporate and U.S.government bonds. They are designed for those about to retire. The index funds will have target dates ranging from 2015 to 2023. They are designed to supplement, not replace, an annuity, BlackRock officials said.

At maturity, the investor can stay in the fund, which liquidates over a decade, or he or she can cash out, possibly moving the funds into an annuity. The indexes will track the expected changes over the years to the median costs of lifetime income for a person turning 65 at the target year. The funds track the indexes.

The funds, Castille adds, can be a substitute for bond funds for the retirement client worried about running out of money.

“What we need is diversification against equities. We want enhanced returns. They will provide reduced duration, improved yield through security selection and still provide the diversification that a retirement client needs,” Castille says.

“The CoRI indexes enable pre-retirees to quickly estimate the annual lifetime income their current savings may generate once they turn 65,” according to a BlackRock release. “Individuals can also invest in CoRI funds, which seek to deliver a total return that tracks the expected median cost of a lifetime income.”

BlackRock officials said CoRI indexes will allow pre-retirees to estimate their lifetime income based on what their current assets will generate once they turn 65. Here’s an example from the BlackRock CoRI Web site. The CoRI 2018 index is 16.50 today, Castille said. “That means if I am going to turn 65 in the year 2018, that for every dollar of annual lifetime income I want, I should have $16.50 cents. This acts like a forward annuity.”

So if a pre-retiree is looking for $100,000 of annual income, he or she needs to invest $1.65 million today. “This a fast way of getting a handle on your retirement needs,” Castille says. He added that bond index approach is unique and the company is applying for patent protection on the CoRI funds.

What could go wrong for the retiree?

There is no guaranteed return for CoRI funds, the money manager said.

“The CoRI funds,” according to a BlackRock statement, “may engage in active and frequent trading and may experience high portfolio turnover. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, their is a corresponding decline in bond values. The CoRI funds may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates.”

Another potential problem: The funds, which are not guaranteed, will contain an initial cost of living adjustment of 2.5 percent that can be changed each year. Castille conceded that, in the case of a sudden spike of inflation, that funds’ performance could have problems generating sufficient income for some clients. Nevertheless, he added, in most cases, the funds will offer either sufficient income or the liquidity to move on to another investment that will enable pre-retirees to reach their goals.

How expensive are these funds?

Castille said the numbers, which he didn’t immediately have, will be competitive with bond index funds.

Investors can stay in a CoRI funds for up to 10 years after an investor turns 65, taking distributions as part of one’s retirement plan. Once an investor reaches the year in which he or she turns 75, the fund will be liquidated. The remaining assets are returned to the investor.