"A mutual fund doesn't really have this formula to calculate the payments to smooth out the payments over time," says Culloton. He says that if an investor simply tried to take out the money on his own at regular intervals, he'd have to settle for something like bonds, which aren't paying out very much, or aggressive equity holdings whose returns are too tumultuous for a sustainable withdrawal rate.
"It will be very lumpy," says Culloton. "There will be years where you're not getting the type of capital gains and income and the overall appreciation to support those payments."
Still, Culloton, among others, says that managed payout funds are still an unproven product. He compares them to mini-endowments. The Vanguard funds in particular, he says, have been moving into riskier territory like REITs, futures and commodities to get returns. And Culloton says there has even been talk of an absolute return type hedge fund product run by the company though it hasn't been implemented yet.
"One thing that worries me is that endowment-style investing is all the rage because the trailing returns of the last 10, 15, 20 years of Yale and Harvard have been phenomenal and they've gotten a lot of press and everyone thinks they're geniuses. That makes me a little bit nervous; it looks a little bit like investing in the rear-view mirror."
Because these funds aren't guaranteed, Beckman and Ameriks both say that they shouldn't be used like annuities but instead should be used for more discretionary spending needs-and stress that because they are not guaranteed, they are not for essential expenses. Indeed, they suggest that the funds' lower payouts during the market downturn were in some ways helpful for investors, forcing them to cut back on exactly the kind of discretionary spending these products would be used for.
"What these funds did is they provided a useful signal," says Beckman. "This is how much you should feel confident in spending and this is how much you ought to pull back to get that annual reset. So the funds did go down. And when we saw the year-end balances at the end of '08, we reset the payments and the payment amounts went down. The good news is that bad markets are often followed by good markets.
"Obviously it's not a comprehensive solution," he continues. "It is an element of an overall portfolio that we think has different characteristics and therefore provides a diversified income stream to a retiree."
Still, some financial advisors say that the way the funds are being marketed, they will indeed confuse investors who might see them as cheap annuity substitutes.
"If these products are going to be used, I think they have to be used in the proper context of a person's individual retirement income strategy," says Dean Barber, the founder of Barber Financial Group in Lenexa, Kan., "and I don't think that they should be a stand-alone program. I'm not saying that they don't have a place at all. But I would be skeptical of thinking that people can just go out and buy a product like that and that it's going to deliver the income that they need to deliver, because everybody's situation is so unique."
Culloton believes that the continuing principal payouts are a short-term drawback that should wash itself out. But his attitude is that the product is still too young to be judged a total success or failure.