Is the time now right for payout funds?

It seemed an idea whose time had arrived: mutual funds specifically designed to transform the nest-egg accumulations of the first baby-boom wave into a stream of retirement income.

But that was 2008, and stock prices were collapsing. As a result, this new category -- known as managed-payout, income-replacement or retirement-income funds -- was not only slow to catch on but it also promptly landed a particularly vulnerable group of investors in a financial ditch.

"In hindsight you can say that wasn't a particularly auspicious time" to make a debut, acknowledged John Ameriks, head of investment counseling and research at the Vanguard Group, which has dominated this fledgling field so far. "It's been a rough ride."

But the group has bounced back. Amid the broader market's gains, a Morningstar compilation of 32 managed-payout funds posted a two-year annualized total return, with reinvestment of all distributions, of 6.10 percent through Sept. 30. That compares with 6.76 percent for Morningstar's Moderate Target Risk group of funds with similar characteristics and 1.27 percent for the Standard & Poor's 500-stock index.

Assets of these funds totaled a modest $900 million or so in August, with Vanguard's three entries -- Managed Payout Distribution Focus, Managed Payout Growth and Distribution and Managed Payout Growth Focus -- accounting for nearly 60 percent of them.

Although consumers have been slow to embrace managed-payout funds, the group's rationale, at least, seems solid. The funds are aimed at investors at the stage of life when the top priority is a flow of income available for spending rather than the accumulation of assets.

Payout funds offer various approaches. Some are set up to provide a specified monthly payout, while others pay variable amounts based on what the portfolio produces. Some plan to deplete principal by a certain year; others can leave assets for heirs. Unlike annuities, payout funds have no guarantees. And they differ from target-date funds in that they are intended to get an investor "through" retirement, not "to" it.

"It's a very attractive idea," said Dan Culloton, Morningstar associate director of fund analysis, albeit with the caveat that its execution "is still a work in progress." He favors funds, like the three from Vanguard, that are run as endowments, meaning they pay out indefinitely, but with no guarantees, instead of liquidating over a specific time.

The payout funds hit the market at a demographically opportune time, at least: The oldest baby boomers reached age 62 in 2008. And tapping nest-egg principal has become essential for many retirees, who in previous times might have been able to live comfortably on interest from money market funds, bank accounts or bonds. That interest income has plummeted of late as the Federal Reserve has maintained a policy of extremely low interest rates.

To be sure, many traditional mutual funds still emphasize stock dividends, and there are always annuities for those willing to trade a big lump sum for the guarantee of a monthly income stream, whether a specified or variable amount.

Then there is the category known as target-date or retirement-date funds, which has a somewhat longer history. Many investors seem to have bought these funds, which gradually emphasize more bonds over stocks as years pass, on the assumption that their increasing conservatism largely insulated them from significant losses. When the market plummeted, there was concern over how well investors understood them.

Christine Fahlund, a senior financial planner at T. Rowe Price, which offers 11 retirement-date funds pegged to dates from 2005 to 2055, as well as one with an unchanging portfolio allocation, said her firm had explored the payout-fund idea but had turned it down. "We thought our retirement-date funds were doing the job," she said recently.

Vanguard's three payout funds, all investing in other mutual funds and intended to distribute 3, 5 or 7 percent of assets a year, had a tough market introduction. Asset values fell as much as 25 percent in the market swoon, forcing payouts to be drawn entirely from capital in 2008 and partly from capital in 2009, Ameriks said.

Over the two years through September, the Vanguard funds returned between 4.3 and 5.8 percent, annualized, below the category average. They've been among the best performers in the most recent 12 months, with returns of 11 to 11.4 percent. The size of payout checks is determined annually, at year-end, using an average of three-year performance; the minimum initial fund purchase is $25,000.

Looking at the overall payout fund group, Culloton of Morningstar said, "They didn't anticipate that the worst-case scenario would happen as they launched." But those who waited to invest until late 2008 or early 2009, however, have had positive results, with returns in the group averaging 9.11 percent in the 12 months through Sept. 30.

Charles Schwab, a distant second to Vanguard in the managed-payout business, has three such funds -- Monthly Income Fund/Enhanced Payout, Monthly Income Fund/Maximum Payout and Monthly Income Fund/Moderate Payout. Their assets in August totaled $160 million. These and the ING Global Target Payment fund are the only ones besides Vanguard's that pulled in more than $10 million of net new money through August.