Some call it a marketing gimmick. But others say it’s pure brilliance, an investment product — much like target-date funds for people saving for retirement — that meets a very real need.
Fidelity Investments this week launched the Fidelity Simplicity RMD Funds, a suite of target-date mutual funds for investors who aren’t quite sure how to invest their money and who have to take required minimum distributions (RMDs) from their IRA, Simple IRA, SEP IRA, or retirement plan account when they reach age 70½.
According to Fidelity, the funds are designed “to help take the guesswork out of determining a suitable allocation for assets that are subject to RMDs.” The mutual funds “combine an age-appropriate and professionally-managed investment strategy with an optional automated calculation and distribution method to satisfy annual RMD requirements on the investor’s behalf,” Fidelity wrote in its release.
The new funds, just like target-date funds, “invest in a combination of equity, fixed-income and short-term Fidelity mutual funds according to a strategic asset allocation that adjusts automatically and becomes more conservative as an investor ages,” Fidelity said. Each fund name includes a date, which can help investors choose the fund that most closely aligns with the year they turn 70, as initial RMDs are required starting at age 70 ½.
At the moment, there are five Simplicity RMD funds: Fidelity Simplicity RMD Income
; Fidelity Simplicity RMD 2005
; Fidelity Simplicity RMD
Fidelity Simplicity RMD 2015
; and Fidelity Simplicity RMD 2020
The funds, according to Fidelity, are designed for investors who are nearing age 70½ or older, or will turn age 70 in or within a few years of the applicable fund, and plan to withdraw the value of their investment in the fund over time (in accordance with IRS rules). For example, a traditional IRA owner who turned 70 ½ in 2015 would select the Simplicity RMD 2015 fund, said Fidelity. The table below shows the ranges of investor birth dates for which each fund was created and each fund’s total expenses.
Fidelity also noted that once a customer invests in a Simplicity RMD Fund, they can set up their distributions through Fidelity’s automatic withdrawals service, allowing them to satisfy the annual RMD and begin receiving income from their eligible retirement accounts.
By signing up, Fidelity said the company will automatically calculate and distribute the investor’s RMD each year, monitor withdrawal activity, and provide “a seamless experience for reinvesting or managing their spending.”
By way of background
The RMD is the minimum amount one must withdraw from their retirement accounts each year, according to the IRS. The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.”
On paper, it might sound simple enough. But RMD rules can be quite complicated. And the penalty for missing an RMD is steep. There is a 50% penalty assessed on the amount of the RMD that is not taken by the deadline, according to this report.
What’s more retirement account owners need to figure out when to take RMDs and from which assets and which accounts. Suffice to say RMDs are the source of much confusion for retirement-account owners. See the IRS’s rules on RMDS.
Marketing gimmick or not
So, what say retirement-account experts to this innovation?
“I think these Fidelity Simplicity RMD funds are a simple marketing technique designed to attract baby boomer investors who are not working with advisers,” said Jeremy Portnoff, the founder of Portnoff Financial. “It looks like a target-date fund with an automatic withdrawal which could be done from any fund — target date or not — or entire portfolio.
There is nothing particularly special about it other than it automates a process which is good for people who are not working with advisers.”
Other advisers agree. “I find it funny that Fidelity is trying to call this approach simple — that usually means the opposite,” said Walter Pardo, a managing partner with Wealth Financial Partners. “I think it’s important to address tax issues, asset allocation issues plus cash flow issues. Because if the client does not need the taxable RMD income to live and could benefit from a Roth conversion perhaps those funds don’t play a part in simplifying anything. Sounds to me like an age-based investment with different wrapping paper. I want to see how simple it’s going to be when the kids inherit these IRAs and forget to take an inherited RMD.”
Other advisers, however, are fond of Fidelity’s new suite of funds. “I love the marketing core competency that Fidelity possesses,” says Bill Harris, a principal with W.H. Cornerstone Investments, Inc. “Unlike most of my professional peers — I’m guessing — I love this idea. For the masses of ‘do-it-your-selfers,’ this is a great idea that will help a lot of people stay out of trouble.”
For his part, Joe Clark, the managing partner of Financial Enhancement Group, speculated that Fidelity Simplicity RMD funds “might be designed for smaller accounts where the RMD is a hassle.” Others agree. “As with most retirement strategies, there is an audience for this type of investment,” said Beverly DeVeny, the chief IRA Analyst at Ed Slott & Company. “It would be good for an unsophisticated individual or one who is having trouble managing financial affairs and for someone who wants to just set it and forget it.”
Potential for RMD error still exists
RMD mistakes can be costly, and some advisers say the Fidelity Simplicity RMD funds could avoid those mistakes. “The 50% is the biggest penalty in the tax code,” said Matthew Curfman, the president of Richmond Brothers. “It makes sense that institutions are starting to look at new tools to help individuals navigate these complex rules with the aging baby boomer demographic.”
Still, Curfman and others have doubts. “While this is a start and I am sure will be helpful for those that use it, it is not a fix for all RMD issues,” he said.
For his part, Portnoff also said Fidelity’s new suite of funds may not be immune from making RMD mistakes. “One issue is the actual calculation of the RMD,” he said. “An automated service like this can make an error either from their system or an incorrect client input and who knows if the error could be caught. There also isn’t an adviser who can help coordinate RMDs from different types of IRAs/plans the client may have. It leaves plenty of room for various possible errors.”
Others share that point of view. “It seems to oversimplify the RMD process,” said Laura Collins, president at Provident Financial Group of the Carolinas. “By that I mean, there is much more to investing than just determining when to take your RMD. An automatic RMD process can be added to any investment program.”
Portfolio not customized
Harris said he hasn’t had a chance to “research the composition (of the funds) and execution is yet to be seen, but overall, I think this helps the investing public.”
Still, Portnoff and others said Fidelity’s approach isn’t as customized as one might get with an adviser. “Those who are working with advisers will have a customized portfolio for their needs, an adviser who can easily calculate the correct RMD and help them understand the RMD aggregation rules and properly coordinate multiple RMDs,” he said.
Collins shared that opinion. “By generalizing these funds, investors miss out on tailored advice and investments specific to their personal lives,” she said. “While this sort of simple approach may work for some, I do not see this strategy being adopted on a larger scale. People still need tailored advice when it comes to their retirement accounts.”
Should investors sign up for the Fidelity Simplicity RMD funds, Curfman said it’s imperative that retirement-account owners “know the (RMD) rules like the back of their hand, or you work with an educated adviser who is specifically trained on this topic.”
Harris also said the Fidelity funds don’t alleviate the need for personal financial advice from a qualified and competent adviser. “Advice will still be needed more than ever,” he said.
To find advisers knowledgeable about IRAs and RMD rules, visit Find an Advisor.
Curfman also suggested that retirement-account owners who invest in the Fidelity Simplicity RMD funds check whether they can still make qualified charitable distributions (QCD) with their RMDs. A QCD is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or Simple IRA) to an organization eligible to receive tax deductible contributions, according to the IRS.
Clark also wondered whether investing in the Fidelity would eliminate other tax-planning opportunities. “The other issue that would frustrate me is that some years — depending on deductions especially in medical expense — you might want to take more than the RMD to maximize tax efficiency,” he said.
Other advisers have even more questions. For instance: Can the individual take more than the RMD? Will the automatic calculations take into account a spouse more than 10 years younger?
And then, there is the disclaimer. “I love reading disclaimers,” said DeVeny. “This one pretty much says that we don’t give you advice and, if we did, you can’t rely on it.”