With the introduction of The Valley Forge Funds, Vanguard will break into the (as of now) niche managed payout fund business. As reported in a recent Ignites article that Vanguard plans roll out the three funds – Vanguard Managed Payout Growth Focus fund, Vanguard Managed Payout Growth and Distribution Fund, and Vanguard Managed Payout Distribution Focus fund – on April 21, 2008. We have been waiting some time for this announcement. In a report we published a few months back on Retirement Income Planning, we reported that the firm’s payout funds were still pending SEC approval.

For those unfamiliar with managed payout funds (also referred to as retirement income funds), they seek to provide a regular stream of income for investors – similar to annuities. Unlike annuities, however, there is no guarantee on managed payout funds. Despite this, managed payout funds feature much lower fees – positioning them as a potential threat to annuities. The Valley Forge Funds will compete with Fidelity’s Income Replacement Funds, which were introduced a few months back. Other major mutual fund companies offering managed payout funds include Charles Schwab and John Hancock. 

It appears that Vanguard is taking some atypical risks with its new line of Valley Forge Funds, which is a bit surprising. First, the funds will have expense ratios significantly higher than most other Vanguard funds (0.58% versus the Vanguard average of 0.20%, according to the abovementioned Ignites article), although still much lower than annuities. Second, the fund will utilize alternative investments. Besides stocks and bonds, the fund plans to invest in commodities, currencies, short sales, derivatives and hybrid securities – uncharacteristic of Vanguard funds. Third, the funds are managed by an undisclosed “investment committee.”

Vanguard certainly picked a good time to strengthen its presence in the retirement income business with annuity alternatives. With approximately 77 million baby boomers in America today beginning to approach retirement, the issue of retirement income has never been bigger than it is now. With that said, Corporate Insight will definitely keep its eyes on developments in retirement income – what was once “the next big thing” may very well be the “current big thing.”