Pension-Like Income From a Defined Contribution Plan

Financial Engines was first to market with a discretionary management strategy incorporating an income target.  Now, Dimensional Fund Advisors and Putnam are getting into the act.  Investment News reports on these new offerings in quite glowing terms.  Financial Engines and DFA accomplish the goal by establishing a core bond portfolio which is to provide the monthly income requested by the client and managing the remainder to provide some inflation protection.  No annuities are employed so as to avoid " single-carrier risk or insurance fees."  For their services, IN reports, Financial Engines charges 50 basis points and DFA charges 45 basis points.

Neither company will guarantee that the income will endure, and neither publishes its investment models supporting their programs.  Therefore we can't analyze the efficacy of the strategy for meeting the targets.  I would expect, though, that the income goals will be under estimated (or conversely capital will be over-committed).  Therefore, total return is likely to be less than optimal.  And still the income target is not guaranteed.

An advisor may be able to provide an overall superior solution with a few helpful tools.  The Otar Retirement Calculator will help and advisors determine whether a client's assets are sufficient to support the required retirement income, and assist in determining an optimal asset allocation.  The Income for Life Model (R) is a robust platform for planning, communicating, and executing a retirement income strategy that can provide a minimum monthly income guarantee, while maintaining full client flexibility over his portfolio.