Fidelity Managed RMD Payout Funds Miss the Mark

Fidelity today announced the Simplicity RMD Funds. These managed-payout funds, which generally aim to provide investors with regular monthly payments (which aren’t guaranteed like annuity payments) have been around for ten years. Managed-payout funds in total represent less than 1% of the available target-date mutual funds available on the market. “Retirees often struggle to understand when, which assets, what amount and how to take the annually mandated withdrawal from their tax-deferred retirement accounts,” said Ken Hevert, senior vice president of Retirement at Fidelity Investments. “If not done correctly, investors may experience a 50% tax penalty on any amount not withdrawn by the annual deadline.”

These RMD payout funds are at the core a target date mutual funds which have a specific accumulation year in the future to better gage your investment risk. An example would be a later dated target date funds, such as the Fidelity Freedom 2020 fund. This funds has 60% percent equity and 40% fixed bonds investment exposure in the fund. It is built for accumulation of assets with a built in asset allocation model.

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The spin on Fidelity’s new RMD Simplicity payout funds are the same as a target dated fund except it has a built in RMD distribution linked to it with another fidelity withdrawal form required. You would still receive a notification from any other IRA investment that a RMD distribution is required if you are older than age 70 1/2 yrs old. So the RMD marketing spin is just that a way to capture assets at Fidelity from IRA holders. Look into a QLAC (Qualifying Longevity Annuity Contract) which the US Treasury has “blessed” as a way to totally defer RMD income payments until age 85 of 25% of your IRA balance or $125,000, whichever is the lesser of.

QLAC income is greater than the income from an investment, such as Simplicity RMD Funds from Fidelity, gaining 5% each year for 25 straight years. The below chart illustrates taking IRA portfolio RMD vs investing that $125,000 IRA into a QLAC and receiving guaranteed lifetime income payments at either 75, 80 or 85 yrs old. At age 90 you would have received $125,031 more income via a QLAC at age 80 than taking the RMD from a portfolio investment. See below for details:

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Annuity Income at age 80: Index vs QLAC


What is the better guaranteed income product for a retiree age 70 wanting guaranteed lifetime income at age 80; Index annuity or QLAC? 

Most popular choice has been the index annuity with almost $50 billion of deposits in 2015.  Allianz Life is the #1 carrier in indexed annuities, with a market share around 25 percent. American Equity Companies held on as the #2 carrier in the market; Security Benefit Life, Great American Insurance Group, and Athene USA followed-up in sales, rounding-out the top five. Allianz Life’s Allianz 222 Annuity was the #1 selling indexed annuity for the second consecutive quarter in 2015.  These index annuities have an optional GLWB (Guarantee Lifetime Withdrawal Benefit) income rider usually for up to 10 years where income is guaranteed for an annually fee above 1%. Fewer and fewer index annuities have income riders that guarantee an income payment for life as the current low interest rate environment is to blame.

The product that got the “blessing” from the Treasury Department in 2014 is the longevity annuity also know as a QLAC (Qualifying Longevity Annuity Contract).  This federally approved “blessing” allowed the RMD from IRA deposits to defer required minimum distributions until age 85.  Usually a one-time deposit for a guarantee lifetime income at a future date chosen by the policy holder. QLAC options include inflation income adjustments of 1% -4% along with CPI-U, death benefits of deposit and joint annuitant for income.


  1. Index Annuity with Income Rider (6.25% ”roll up rate” annually for 10 year, 6.8% withdrawal rate at age 80)  10 years at age 80  lifetime income is $12,842 annually

  2. QLAC or Longevity annuity 10 years at age 80  lifetime income is $15,950 annually

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