A Tax-Savvy Way to Bolster Your Retirement

According to a recent study by Lipper Research, taxes are the single biggest drag on the performance of equity mutual funds held in taxable accounts. The study shows that over the past decade, the average stock fund gave up 1.6 percentage points in annual return and the average taxable bond fund gave up 2.4 percentage points in annual return to federal taxes on distributed income and gains. Those figures don't take into account state and local taxes, which can act as a further drag on performance.

"If we can save [those costs], it is an enormous benefit," Eaton Vance's Faust says.

John Blamphin, retirement income specialist and investment advisory representative with Retirement Strategies of Maryland, notes that many of the program's features, such as systematic savings, asset allocation and a range of preset portfolios, are already available in the retirement marketplace; the interesting twist is the dynamic asset allocation

He expects other fund companies to develop similar products. "I think you'll probably see a trend in this direction ... companies trying to make it as easy as possible to invest with them and make it easier for the adviser."

Blamphin does note a potential drawback: By limiting themselves to tax-managed funds in this program, investors may be sacrificing higher returns available elsewhere. "If I'm putting together a tax-managed portfolio for someone, I'm probably going to be looking at tax-equivalent yield," he says, adding that some taxable investments can generate higher returns than tax-managed equity funds and tax-free bond funds, even when the impact of taxes is taken into account.