Forget Annuities? How Managed Payout Funds Offer a Simpler Path to Retirement Income
Introduction: The Retirement Income Puzzle
For decades, retirees have faced the same daunting challenge: how to transform a lifetime of savings into a reliable stream of income that will last for the rest of their lives. This transition from a nest egg to a steady paycheck can be fraught with anxiety, as a single misstep can have long-lasting consequences. The conventional wisdom has almost always pointed to one solution for this problem: buying an annuity.
But what if there’s a simpler, more flexible way? Policy experts are now exploring a powerful alternative designed for the modern retiree, though it faces hurdles to widespread adoption.
In a recent discussion with ThinkAdvisor, David John of the AARP Public Policy Institute outlined a new path forward—a lesser-known option that challenges the long-held belief that a complex, guaranteed product is the only answer for generating retirement income.
The “Annuity for Everyone” Rule Is Being Challenged
The long-held financial advice that annuities are the universal solution for retirement income is now being questioned. Experts are re-evaluating whether these vehicles, known for their guarantees and complexity, are truly the right fit for every person’s financial situation. This new thinking is opening the door for different strategies.
One of the leading alternatives is the “managed payout fund.” David John calls this type of fund “a major alternative to an annuity.” Unlike an annuity, which provides a guaranteed outcome, a managed payout fund is a diversified pool of investments designed to produce a relatively consistent level of income without the guarantee. The goal of this discussion is to move beyond a one-size-fits-all approach to retirement planning.
“The conventional wisdom is that everyone should be in an annuity, but in the managed payout paper we address the question: Is that the right vehicle for everyone?”
— David John, AARP Public Policy Institute
Think of Them as “Target-Date Funds for Spending”
The easiest way to understand managed payout funds is to compare them to a financial tool many people already have in their 401(k)s: Target Date Funds (TDFs). While structurally similar, they are designed for two different phases of the retirement journey.
A TDF is built for the accumulation phase—its goal is to grow your savings over time for retirement. A managed payout fund, in contrast, is specifically designed as a “decumulation vehicle” for the spending phase. Its purpose is to pay out monthly or quarterly cash distributions to retirees. According to John, their strategy is “to generate regular investment earnings and gains for income with carefully managed risk to reduce losses.” In short, while a TDF helps you build your nest egg, a managed payout fund helps you spend it down methodically.They’re Designed for Middle-Income Retirees, Not the Wealthy
While many sophisticated financial products are aimed at high-net-worth individuals, managed payout funds are specifically designed for the “middle-income retiree.” This is a significant distinction that makes them a particularly relevant tool for a large portion of the population.
This target retiree is someone who needs income to supplement Social Security but is unlikely to have access to the expensive, sophisticated financial guidance that upper-income individuals can afford. The focus is on providing a straightforward, accessible solution for the very group that often finds the world of retirement income products confusing and overwhelming. It’s a tool aimed at simplifying a complex problem for the majority of retirees, not just the wealthiest.
“A retiree who needs the income other than Social Security but is not likely to have the same sophisticated guidance and advice that you’ll see with upper-income individuals.”
— David John, AARP Public Policy InstituteThe Goal is an Automatic and Flexible Income Stream
The ultimate vision for managed payout funds is to make them a “default decumulation solution” within retirement plans. Much like auto-enrollment has simplified saving for millions of workers, these funds could simplify the equally important process of turning savings into income.
This automation is paired with a critical advantage: flexibility. A retiree using a managed payout fund could make a change “without a cost or high complexity.” This highlights the fundamental trade-off: an annuity’s guarantee often comes at the cost of rigidity and high exit fees, whereas a managed payout fund prioritizes flexibility, albeit without the guarantee.
To address the lack of a lifetime guarantee, the proposed strategy is to couple these funds with longevity annuities, which begin making payments only when the owner reaches an advanced age. This creates a powerful hybrid approach: flexible income in early retirement, with a guaranteed backstop for later in life.
However, there is a major challenge: these funds are currently offered on a retail basis but are not yet widely available in employer-sponsored 401(k) plans. For them to become a default option, policy experts believe the Labor Department would need to change its qualified default investment alternative (QDIA) regulations. Alternatively, some experts suggest that Target Date Funds could be structured to automatically shift a retiree’s assets into a managed payout fund at retirement, a move that might be allowable under current law.
Conclusion: A Simpler Path Forward?
For retirees who find annuities too rigid, complex, or costly, the managed payout fund represents a simple and accessible alternative for generating retirement income. By functioning like a target-date fund for the spending phase of life, it offers a straightforward way to automate income without locking you into an irreversible decision. It’s a solution designed for the many, not the few.
While regulatory hurdles remain before this option becomes a fixture in 401(k) plans, it represents a significant shift in thinking about the future of retirement. As you plan your own financial future, it raises a crucial question: what do you value more—an iron-clad guarantee that comes with complexity, or a flexible income stream that simplifies one of life’s biggest financial decisions?
