Vanguard Cuts Target-Date Fund Fees as Fidelity Continues to Gain Momentum
Investing in low-cost target-date funds continues to get cheaper. On Sept. 28, 2021, Vanguard announced plans to merge the Vanguard Institutional Target Retirement series into the Vanguard Target Retirement series in February 2022, with the result that shareholders in both will pay less.
The merger makes sense as the portfolios of these legally separate funds are practically identical. The main difference between them, in other words, has been fees and investment minimums. The institutional version of the series has charged 0.09% for defined-contribution plans with at least $5 million. Plans below that threshold could invest in the investor series for 0.12% to 0.14%, depending on the target-date vintage. Meanwhile, investors outside of a defined-contribution plan have had a low minimum investment of $1,000.
Once the merger finishes, all shareholders will pay 0.08%, and there will be no plan-level minimum; investors outside of a plan will still have the $1,000 minimum. This puts the series on par with Schwab Target Index as the cheapest target-date series that don't have a minimum threshold at the plan level.
Vanguard's fee cut also makes it generally cheaper than the Fidelity Freedom Index series, which has emerged as the top competitor to Vanguard's low-cost target-date throne. Although Fidelity Freedom Index, which has a Morningstar Analyst Rating of Silver, does have one share class at the 0.08% price range and another at 0.06% for plans with at least $2 billion, as of Sept. 29, it still had a $5 million plan level minimum threshold, and its investor share class charges 0.12% across the series. Given Vanguard's announcement, we don't expect it to stay that way for long, though.
Fidelity Beating Vanguard's Retail Business at Its Own Game ...
Fidelity hasn't been shy in keeping up with Vanguard's retail business when it comes to fees and investment minimums for its Freedom Index series. Exhibit 1 shows how the fees for the 2040 versions of the lowest-minimum-investment share classes of each series have trended over time, including the projected fees for the Vanguard series once it reaches its single-share-class state in 2022.
From 2012 through the September 2021, Fidelity was consistently cheaper, though never by more than a few basis points. Yet, following the merger, Vanguard will cost less for the first time in a decade.
History suggests Fidelity won't stay idle. In June 2015, for example, both series launched institutional share classes priced at 0.10%. When Vanguard dropped its fees to 0.09% in 2017, Fidelity then chopped its levy to 0.08% in 2018.
More recently, Vanguard cut its institutional shares' minimum investment to $5 million in December 2020 from $100 million previously. A month later, Fidelity made the same cut to its institutional shares' minimum.
The competition has been a boon for Fidelity. Since 2020, Fidelity Freedom Index has supplanted Vanguard's retail business as the top index-based target-date series among mutual funds. Fidelity's net $34 billion of inflows into its index-based series nearly tripled Vanguard's $13 billion haul. It's a stark reversal from the previous two years, when Vanguard’s retail business brought in more than $70 billion of net inflows while Fidelity garnered less than $20 billion.
Exhibit 2 shows the annual flows into each mutual fund series since 2016.
… but Not With Larger Plans
Fidelity's success has mostly been confined to mutual funds though. Vanguard has retained its lead when it comes to institutionally focused collective investment trusts, or CITs. These vehicles are only available through 401(k) plans and are most popular with the largest plans. That's because unlike mutual funds, plan sponsors can negotiate fees on CITs, and the largest plans use this to their advantage. Obviously, when the cheapest share class of the mutual fund is already as low as Vanguard's and Fidelity Freedom Index's, there's only so much room to lower fees. But when it's a multi-billion-dollar plan, every basis point counts. For example, for a $10 billion plan that had been paying 0.10%, a drop to 0.05% cuts the collective fees that participants pay from $10 million to $5 million from $10 million.
Exhibit 3 shows the flows into each series' CITs since 2020.
Since the biggest plans favor CITs, Vanguard's advantage with this vehicle has propelled it to larger overall flows in year-to-date 2021. Still, the momentum Fidelity has developed in target-date mutual funds is impressive.
The Tale of the Tape
Recent performance may be driving some of Fidelity's momentum. Exhibit 4 shows the average Morningstar Category rank for each vintage of both series' investor share classes over major trailing periods.
Fidelity holds an edge over the past three and five years ended Aug. 31, though Vanguard still wins out over the longer 10-year period. Both have struggled over the trailing one-year period.
Each series holds 40% of its equity portfolio in international stocks, which is about 10 percentage points higher than the average target-date fund, and that's been a headwind as U.S. stocks have continued to outpace the rest of the world in 2021.
On the bond side, they've faced an additional challenge from rising interest rates, which has been a common pain for index-based target-date series.
It's All About the Bonds
Going forward, the performance of the series' fixed-income portfolios will determine the ultimate winner, especially since both series' equity glide paths are also very similar, as Exhibit 5 shows.
Vanguard does start to lower its allocation to stocks a little sooner than Fidelity. After reaching the target date, it has one of the sharpest equity drops in the first five years of retirement before settling at its 30% equity landing point. That's 11 percentage points higher than Fidelity's. Yet, both have an average allocation of about 62% to stocks across the glide path, so the differences should even out over time.
The bond portfolios are very different, though. Vanguard invests 30% of its fixed-income portfolio in Vanguard Total International Bond (VTIBX), which hedges out international currency exposure from its underlying bonds. Fidelity doesn't include any strategic allocation to non-U.S. bonds, though it does take a more nuanced approach by including long-duration U.S. Treasuries, which have historically been a strong diversifier for portfolios with lots of equity exposure.
A Win-Win for Investors
Given their low costs and broad straightforward portfolios, both series have considerable appeal, as signified by their Analyst Ratings of Silver, which indicates one of our highest conviction levels in a target-date strategy's ability to outperform its category benchmarks on a risk-adjusted basis. That Vanguard and Fidelity are competing on price is ultimately a win for investors in either, who will get to keep more of what of each series earns.
The Best Fidelity Funds for 401(k) Retirement Savers
Fidelity is all about good stock picking. The firm's culture centers on it, and it's why so many Fidelity funds remain popular among retirement savers.
It stems from the company's early days, when firm founder Ned Johnson would tell his fund managers, "Here's your rope. Go ahead and hang yourself with it." It gave Fidelity's portfolio managers and analysts the freedom to choose good stocks, whatever their approach. And it worked. The firm is home to some of the industry's best fund managers ever, past and present, including Peter Lynch and Will Danoff, as well as some of the most popular funds in 401(k) plans across the country.
In this year's survey of popular 401(k) funds, which comes courtesy of financial data firm BrightScope, 17 funds from Fidelity rank among the top 100. Four are index funds: Fidelity 500 Index (FXAIX), Extended Market Index (FSMAX), International Index (FSPSX) and US Bond Index (FXNAX). But the remaining 13, seven of which are from the firm's Freedom target-date series, are actively managed.
Read on as we look at some of the best Fidelity funds for your 401(k) plan (and weed out some of the lesser options). We'll review all of the actively managed funds, including Fidelity's target-date series, and rate them Buy, Sell or Hold.
Returns and data are as of Oct. 20, unless otherwise noted, and are gathered for the share class with the lowest required minimum initial investment – typically the investor share class or A share class. The share class available in your 401(k) plan may be different.
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Fidelity Balanced: BUY
- Symbol: FBALX
- Expense ratio: 0.52%
- One-year return: 20.0%
- Three-year annualized return: 11.0%
- Five-year annualized return: 10.9%
- 10-year annualized return: 10.3%
- Rank among the top 401(k) funds: #50
- Best for: Moderate investors who want a stock-bond combination fund and are willing to put up with some volatility
Compared with its peers, Fidelity Balanced is an excellent choice for investors looking for a one-stop fund that holds stocks and bonds. Over the past five and 10 years, Balanced fund's annualized returns outpace at least 95% of all other so-called balanced funds, which hold roughly 60% of assets in stocks and 40% in bonds.
But investors should be prepared for some added volatility. FBALX is more stock-heavy than its typical peer. At last report, Balanced had 67% of its assets in equities; the typical balanced fund, on the other hand, held an average of 58% of assets in stocks. That adds to the fund's volatility. Over the past five and 10 years, Fidelity Balanced has had above-average volatility compared with its peers, according to Morningstar.
FBALX has an unconventional setup. Robert Stansky is its lead manager, and he makes the big-picture decisions of how much to put in stocks and how much to put in bonds. He also oversees the fund's eight stock pickers, who are essentially sector specialists, and four bond pickers. The bond side holds mostly investment-grade bonds and some high-yield corporate debt.
Learn more about FBALX at the Fidelity provider site.
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Fidelity Blue Chip Growth: BUY
- Symbol: FBGRX
- Expense ratio: 0.79%
- One-year return: 60.9%
- Three-year annualized return: 26.5%
- Five-year annualized return: 22.4%
- 10-year annualized return: 19.1%
- Rank among the top 401(k) funds: #65
- Best for: Aggressively minded investors with long-term time horizons
Fidelity is chock full of good funds that invest in growing companies, and Fidelity Blue Chip Growth is one of its best. Manager Sonu Kalra has run the fund since mid-2009. Over the past 10 years, FBGRX beats 95% of its peers – funds that invest in large, growing companies – with a 19.1% annualized return. It beats the 13.4% annualized gain in the S&P 500, too.
Kalra focuses on companies with above-average earnings growth potential that the market doesn't recognize. In particular, he looks for events that might kick the business into a higher gear, such as a new product launch, a change in executives at the top or a turnaround strategy.
The fund's 60.9% gain over the past 12 months is a chart-topping return. Tesla (TSLA), which has soared 721% over that period, was a top contributor by a wide margin thanks to record sales in China and four consecutive profitable quarters.
The fund is peppered, too, with newly issued stocks that have done well of late. Shares in Peloton Interactive (PTON), which went public in September 2019, climbed 461% over the past 12 months. CrowdStrike Holdings (CRWD), a cybersecurity tech company stock that launched in June 2019, has climbed 203% over the past year.
Learn more about FBGRX at the Fidelity provider site.
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Fidelity Contrafund: BUY
- Symbol: FCNTX
- Expense ratio: 0.85%
- One-year return: 37.0%
- Three-year annualized return: 18.1%
- Five-year annualized return: 17.2%
- 10-year annualized return: 15.5%
- Rank among the top 401(k) funds: #5
- Best for: Moderate investors looking for a tamer growth fund
Fidelity Contrafund has been a solid performer for so long that it seems many people don't pay attention anymore. But manager Will Danoff still delivers market-beating returns. Over the past 12 months, the fund's 37.0% return trounces the 17.5% gain in the S&P 500.
Tech and communications services stocks helped fuel the fund's rise, particularly software and services companies such as Adobe (ADBE), Shopify (SHOP), PayPal (PYPL) and Salesforce.com (CRM). Amazon.com (AMZN), FCNTX's top holding, helped, too.
Danoff, who has managed Contrafund for more than 30 years, has been successful in part because he's adapted his approach as his fund has aged and grown. (Contrafund, with $131 billion in assets, is one of the biggest actively managed stock funds in the country.)
In the mid-1990s, for instance, 700 stocks filled the fund. Today, it holds roughly 330.
But Danoff's investment methodology is the same as it was in the fund's early days: He focuses on "best-of-breed" firms with superior earnings growth, proven management teams and sustainable competitive advantages that seem overly beaten down or overlooked. In the first half of 2020, he purchased shares in asset manager BlackRock (BLK) at $420 a share, for only 13 times his estimates for earnings in 2021.
Learn more about FCNTX at the Fidelity provider site.
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Fidelity Diversified International: HOLD
- Symbol: FDIVX
- Expense ratio: 0.75%
- One-year return: 17.3%
- Three-year annualized return: 6.9%
- Five-year annualized return: 7.7%
- 10-year annualized return: 7.0%
- Rank among the top 401(k) funds: #56
- Best for: Foreign stock exposure
Investors have given foreign-stock funds short shrift lately because U.S. stocks have performed so much better in comparison over the past decade. But a well-diversified portfolio should have a stake in international shares.
The issue is finding a good fund.
It might not be Fidelity Diversified International. We want to be gung-ho about this mutual fund, in part because it is the only actively managed Fidelity foreign-stock fund among the top 100 401(k) funds. William Bower, who has run FDIVX since 2001, has decades of experience. He searches for companies in developed countries that have strong balance sheets, a high return on capital (a measure of profitability) and improving earnings-growth potential.
The problem is next to its peers, Diversified International is just average. It has outpaced funds that invest in growing large foreign companies in only five of the past 10 full calendar years beginning in 2010.
That said, this fund beats two major foreign-stock benchmarks. The fund's 7.0% annualized return over the past decade handily outpaces the MSCI EAFE index, as well as the MSCI ACWI ex USA benchmark, over the past 10 years.
All told, we're neutral on Diversified International, which explains the fund's Hold rating. If it's the only actively managed foreign-stock fund available to you in your 401(k) plan, it isn't a horrible choice. But you might consider other actively managed foreign-stock funds if any are available in your retirement-savings plan.
Learn more about FDIVX at the Fidelity provider site.
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Fidelity Growth Company: BUY
- Symbol: FDGRX
- Expense ratio: 0.83%
- One-year return: 70.0%
- Three-year annualized return: 27.5%
- Five-year annualized return: 24.6%
- 10-year annualized return: 20.5%
- Rank among the top 401(k) funds: #25
- Best for: Aggressive investors
Fidelity Growth Company is one of the best stock funds in the country. Unfortunately, it has been closed to new investors since 2006. But if your workplace retirement plan offers it, that restriction doesn't apply to you.
FDGRX's 15-year annualized return, 15.4%, beats all but five U.S. stock funds. It also beats the S&P 500 by an average of nearly 6 percentage points annually over that period.
Short-term returns are impressive, too. Over the past 12 months, the fund's whopping 74.5% gain, lifted in part by stakes in Shopify, Wayfair (W) and Moderna (MRNA), is one of the best returns of all diversified U.S. stock funds.
This is a high-risk, high-reward fund. Steven Wymer has run it for nearly a quarter century, looking for companies with resilient business models that will fuel rapid growth over a three-to five-year period, says Morningstar analyst Robby Greengold. That means in addition to established, giant-size firms, such as Nvidia (NVDA) and Netflix (NFLX), he also owns shares in small companies such as Penumbra (PEN), an $8 billion maker of medical instruments.
Some might find the resulting ride thrilling; others, gut-wrenching. FDGRX has been roughly 20% more volatile than the broad U.S. stock market over the past decade. But the rewards have been sublime. A $10,000 investment in the fund 10 years ago would be worth nearly $56,000 today. A similar investment in an S&P 500-stock index fund would amount to just over $36,000.
Learn more about FDGRX at the Fidelity provider site.
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Fidelity Low-Priced Stock: BUY
- Symbol: FLPSX
- Expense ratio: 0.78%
- One-year return: 5.8%
- Three-year annualized return: 4.3%
- Five-year annualized return: 6.7%
- 10-year annualized return: 10.0%
- Rank among the top 401(k) funds: #60
- Best for: Investors looking for a solid value-oriented fund
Critics say Fidelity Low-Priced Stock isn't what it was 20 years ago, but it's still impressive. Over the past decade, FLPSX's 10.0% annualized return beats 89% of its peers – funds that invest in midsize companies trading at a bargain. What works against it, in part, is that the fund used to be considered a small-company fund, and it still uses the Russell 2000 Index, which tracks small-company shares, as its benchmark.
But the fund has always been focused on companies of all sizes. Manager Joel Tillinghast launched the fund 30 years ago to invest in stocks trading at a discount whether they were small and fast growing, or big and underappreciated. The common link: cheap stocks with a share price below $15.
Today, with a bulging $24 billion in assets, FLPSX's low-price threshold is now $35 a share. And the fund is more international than it was a decades ago. More than 40% of the fund holds foreign stocks, such as Canadian grocer Metro, U.K. property developer Barratt Developments (BTDPY), and Taiwanese electronics contract manufacturer Hon Hai Precision Industry.
Tillinghast, a legend in the business, now manages 95% of the fund's assets. Five co-managers handle the rest. Some focus on specific sectors; others are generalists who invest across the market. Together they still apply Tillinghast's investing philosophy, focusing on companies with solid balance sheets, that are run by good, honest executives, have stable earnings growth and trade at a discount to their view of a fair price. The stocks that suit that approach generally have been out of favor in recent years. But the fund's 5.9% return over the past 12 months beats 95% of its peers.
Learn more about FLPSX at the Fidelity provider site
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Fidelity Puritan: HOLD
- Symbol: FPURX
- Expense ratio: 0.53%
- One-year return: 21.0%
- Three-year annualized return: 11.0%
- Five-year annualized return: 10.8%
- 10-year annualized return: 10.4%
- Rank among the top 401(k) funds: #74
- Best for: Moderate investors who want an all-in-one stock-and-bond fund
Fidelity has two balanced funds on the roster of top 401(k) funds: Fidelity Puritan and the aforementioned Fidelity Balanced. Both funds devote roughly 60% of assets to stocks and 40% to bonds, but the similarities end there.
For starters, Puritan has just one manager: Daniel Kelley, who started in July 2018. (Balanced, as we've mentioned, has specialists on the bond and stock sides of the fund, and a lead manager who makes the big-picture calls.)
Kelley is relatively new at Puritan, which is the main reason we have a Hold rating on the fund. Things look promising so far, though. Since he started in July 2018, the fund has returned 11.9% since he took over, better than the typical balanced fund annualized gain of 6.7%.
FPURX holds 65% of assets in stocks, a bigger equity stake than its peer, which holds 58%. Most of the roughly 200 stocks are in U.S. shares, primarily in tech and health care. Kelley favors a growth-at-a-reasonable price approach, focusing on stocks he thinks are attractive priced relative to their earnings-growth prospects. Microsoft (MSFT), Amazon.com and Apple (AAPL) are the fund's top holdings.
On the bond side, Kelley holds mostly investment-grade corporate bonds – primarily financials and industrials – and securities-backed debt and Treasuries. Those holdings helped the fund in 2020, but a 5% stake in high-yield funds were a modest drag on relative performance.
Learn more about FPURX at the Fidelity provider site
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Fidelity Freedom Target-Date Series: BUY
- Rank among the top 401(k) funds: #29 (FFFDX, 2020); #28 (FFTWX, 2025); #23 (FFFEX, 2030); #36 (FFTHX, 2035); #34 (FFFFX, 2040); #54 (FFFGX, 2045); #61 (FFFHX, 2050)
- Best for: Investors who want help with their retirement investment plan
Choose a fund with the year closest to when you plan to retire. Stash all of your retirement savings in the fund and then let the experts do the investing work for you. They'll decide how much to hold in stock, bonds and cash and adjust the portfolio to a more conservative mix as you grow older.
Fidelity's Freedom funds are the firm's flagship target-date series. The fund company has a relatively newer index-based series, called Freedom Index. But the actively managed target-date funds are immensely popular, and many rank among the top half of BrightScope's roster of funds with the most 401(k) assets.
The series was retooled several years ago, including a tweak to the funds in the plan and the allocation of the glidepath – the way the blend of stocks and bonds changes over time. A Freedom fund geared to a 25-year-old saver just starting out would hold a portfolio comprised of 54% U.S. stocks, 36% foreign stocks and 10% bonds. The Freedom portfolio for a 60-year-old holds 36% in U.S. stocks, 23% in foreign shares, 37% in bonds and 4% in cash.
Learn more about Fidelity's Freedom target-date series at the provider site.
The Best Target Date Funds For Retirement
We considered several factors to identify the best target date funds, including fees, performance, asset allocation and glide path.
Studies show that fees are a good indicator of a fund’s success. The lower the fees, the more likely the fund will outperform its more expensive counterparts. That’s not to say that expenses should be our only criteria, but they are an important one.
Most of the funds in our list have expense ratios below 50 basis points, and the most expensive is 80 basis points. There are target date funds, however, that cost more than 100 basis points. We believe that the performance of these funds do not justify the cost.
While target date funds have been around since the 1990s, performance data is limited. Because mutual fund companies have made changes to their target date funds, performance data are limited to 5-year returns. Our list will likely change as 10-year returns become available over the next several years.
The asset allocation of a target date retirement fund changes over time. In 2060 funds, equities are heavily weighted as investors have 40 years until retirement. In contrast, 2020 funds typically have no more than about 50% in equities, as those retiring in 2020 begin to use fund assets for living expenses.
While we weren’t looking for one “right” allocation, we did look for equity allocations above 80% in 2060 funds. The seven funds in our list typically allocated 90% to equities, although one fund had an 85% allocation. For the 2020 funds we examined, the range of equity allocations was more varied. They ranged from a high of 60% to a low of 35%.
Based on research by William Bengen (and others) on the 4% rule, we believe a retiree should have an equity allocation of at least 50%. As the allocation falls below this level, the longevity of the portfolio decreases. In other words, the odds of a retiree running out of money during retirement goes up. Unfortunately, while some target date funds maintain a 50% equity allocation at retirement, they all fall significantly below this level as the retiree ages.
Glide path describes how the asset allocation of a target date fund changes over time. There are “to” and “through” glide paths. With a “to” glide path, the allocation does not change once the fund reaches its designated year. For example, a 2020 fund’s asset allocation wouldn’t change in 2021, 2022, or even 2040.
In contrast, a “through” glide path continues to alter the asset allocation of a fund after its designated year. All of the funds in our list use a “through” glide path. For some, the changes in asset allocation stop after about five to seven years. For others, the changes continue for decades.
While we are agnostic on the “to” versus “through” debate, the same is not true for the stock to bond allocation. In all target date funds we examined, the equity allocations fall far below the 50% mark. As such, those using target date funds should carefully consider whether these funds best meet their needs in retirement.
SoFi Automated Investing
SoFi Automated Investing
Fidelity Freedom® Funds
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Designed for investors who anticipate retiring in or within a few years of the fund's target retirement year at or around age 65. Investing in a combination of Fidelity domestic equity funds, international equity funds, bond funds, and short-term funds (underlying Fidelity funds), each of which (excluding any money market fund) seeks to provide investment results that correspond to the total return of a specific index. Allocating assets among underlying Fidelity funds according to a "neutral" asset allocation strategy that adjusts over time until it reaches an allocation similar to that of the Freedom Index Income Fund approximately 10 to 19 years after the target year. Ultimately, the fund will merge with the Freedom Index Income Fund. FMR Co., Inc. (the Adviser) reserves the right to modify the fund’s neutral asset allocations from time to time when in the interests of shareholders. Buying and selling futures contracts (both long and short positions) in an effort to manage cash flows efficiently, remain fully invested, or facilitate asset allocation. The Adviser may use an active asset allocation strategy to increase or decrease neutral asset class exposures reflected above by up to 10 percentage points for Equity Funds (includes domestic and international equity funds), Bond Funds and Short-Term Funds to reflect the Adviser's market outlook, which is primarily focused on the intermediate term. The asset allocations in the "Choosing a Freedom Fund" section above are referred to as "neutral" because they do not reflect any decisions made by the Adviser to overweight or underweight an asset class.
The investment risk of each Fidelity Freedom Fund changes over time as its asset allocation changes. These risks are subject to the asset allocation decisions of the Investment Adviser. Pursuant to the Adviser's ability to use an active asset allocation strategy, investors may be subject to a different risk profile compared to the fund's neutral asset allocation strategy shown in its glide path. The funds are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, commodity-linked and foreign securities. Leverage can increase market exposure, magnify investment risks, and cause losses to be realized more quickly. No target date fund is considered a complete retirement program and there is no guarantee any single fund will provide sufficient retirement income at or through retirement. Principal invested is not guaranteed at any time, including at or after the funds' target dates.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
Date best fidelity target funds
10 of the Best Target-Date Fund Families
Target-date funds are a core component of many investors' retirement strategies. And for good reason: These funds provide a one-stop shop for retirement investors.
Every target-date fund adjusts its asset allocation from more aggressive and growth-oriented holdings in the early savings years to more conservative capital-preservation strategies as investors near and enter retirement. All investors need to do is choose the fund that most closely aligns with their target retirement date, and the portfolio managers will take care of the rest.
However, choosing is easier said than done.
Target-date funds vary in their cost, structure and methodology. While one 2050 target-date fund may use 90% stocks, another could hold only 60% stocks. These differences can result in widely different investment experiences for participants.
In general, when evaluating target-date funds, keep the following in mind:
- Cost: All target-date funds require some degree of active management, as someone has to make the rebalancing decisions for you. But costs will vary depending on what these funds invest in. Some target-date funds hold lower-cost index funds while others use active funds that are pricier, but might provide the potential for higher returns or a less volatile investment journey.
- "To" versus "through" glidepaths: A target-date fund's glidepath is how it manages the level of risk, or equity (more risky) versus fixed-income (less risky) exposure, throughout an investor's lifetime. Some funds reach their lowest equity allocation at the target retirement date and then maintain that exposure throughout retirement, known as a "to" glidepath, because they manage to retirement. Other funds manage through retirement by continuing to de-risk after (or through) the target retirement date. The "to" glidepath strategy argues that the riskiest day of an investor's financial life is the day she retires. Managers of "through" portfolios would argue that because investors are living for 30-plus years in retirement, they need a higher allocation to growth investments at their retirement date.
- Aggressiveness: Target-date funds offer varying degrees of aggressiveness. The fund families on our list range from 99% equities in the early years to 82% equities; in retirement, they range from 55% equities to only 8%. Funds heavier in stocks have higher growth potential, in theory, but they're riskier and have the potential for more volatile returns.
Read on as we look at the distinguishing features of 10 of the industry's best target-date fund providers.
Fund families listed in alphabetical order.
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We'll start with the American Funds Target Date Retirement Series, which focuses on balancing investors' two primary objectives when investing for retirement: building wealth, then preserving wealth.
The funds aim to accomplish this by using a glidepath-within-a-glidepath strategy. By shifting into larger-cap, dividend-paying equities around and into retirement, the funds are able to mitigate some volatility without needing to lean more heavily on fixed income.
"At age 65, investors still have a long investment horizon, they need meaningful equity exposure, but the amount and types of equities they hold should continue to change as they sustain distributions in retirement," says Rich Lang, investment director of the American Funds Target Date Retirement Series. "Our objective based glide path differentiates the volatility of equities used across the series, allowing older participants to hold more equities, with less volatility than peers."
American Funds' target-date funds start at a 90% equity allocation, moving to 45% equities at retirement and finally settling at 30% equity. That puts this family around the middle of the pack in terms of degree of equity exposure.
American Funds also gives fund managers the ability "(within a reasonable range) to select the most appropriate asset class to help participants best achieve their objectives," Lang says. "This focus on the outcome (ends) versus the means (asset class) provides the Series with a degree of flexibility that has benefitted participants over its lifetime and more recently via a tactical tilt toward larger-cap and U.S. equities."
Learn more about American Funds' target-date funds at the provider site.
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BlackRock manages three series of target-date mutual funds, all of which are only available in retirement plans.
"LifePath Index is a low-cost, long-horizon strategy which uses index building blocks," says Nick Nefouse, co-head of the LifePath target-date lines at BlackRock. "LifePath Dynamic seeks to provide higher risk-adjusted returns than LifePath Index utilizing the full BlackRock platform. Our newest offering is LifePath ESG, which incorporates ESG indices into the target-date fund series."
Each series uses the same research and glidepath, going from 99% equities in the early accumulation years to 40% at and through retirement. Unlike most of the other target-date funds on this list, BlackRock's funds don't continue to de-risk into retirement.
"The riskiest day of your financial life is the day you retire, so we have our lowest equity weight at the point of retirement," Nefouse says. This landing point of 40% equity and 60% high-quality fixed income is a reflection of "LifePath's retirement objective (of) maximizing spending, limiting spending volatility and addressing longevity risk."
Dating back to 1993, the LifePath series have seen more changes and market cycles than any other target-date fund manager, he says. "Our research has continuously evolved; most recently around incorporating lifetime income as an asset class into a (target-date fund)."
The LifePath Index series has the distinction of being the only Gold-rated index target-date series by Morningstar. The LifePath Dynamic funds are rated Bronze and the ESG offering is not yet rated.
Learn more about BlackRock's target-date funds at the provider site.
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Fidelity has been in the target date space for 23 years. It provides three types of target-date funds, which can be distinguished by the type of underlying funds each invests in:
- Fidelity Freedom Funds invest in primarily actively managed funds.
- Fidelity Freedom Index Funds invest entirely in passively managed underlying funds.
- Fidelity Freedom Blend Funds invest in a mix of actively and passively managed funds.
As such, the Freedom Funds have the highest expense ratios, while the Freedom Index Funds have the lowest of the three types.
"Diversification is a core principle within Fidelity's target date strategies, providing a balance among exposures in the portfolios to help navigate the uncertainty of capital markets over long-term time periods," says Sarah O'Toole, institutional portfolio manager at Fidelity Investments.
Fidelity's target-date funds use a "through" glidepath, continuing to adjust the asset allocation after retirement to combat the risk of running out of assets in retirement, which the company believes to be the most significant risk to retirees.
"As investors approach and enter retirement, their ability to 'hedge' a potential income shortfall is reduced, because new or additional sources of income may not be available," O'Toole says. Fidelity's "through" glidepath "addresses the challenge of retirement investors' long time horizon by balancing the potential for short-term volatility with long-term retirement income objectives."
The Freedom Funds progress from a roughly 90% equity allocation early in the savings period to a 51% equity allocation at retirement, then continue to reduce equity exposure for approximately 18 years in retirement, finally settling at 19% equities.
Learn more about Fidelity's target-date funds at the provider site.
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John Hancock stands out in that it offers both "to" and "through" target date series.
Its Multimanager Lifetime Portfolios – its only portfolios available outside of company retirement plans – and Multi-Index Lifetime Portfolios follow a "through" glidepath that begins at 95% equity, tapers to 50% at retirement then stabilizes at 25% equity through retirement. This makes the funds more aggressive than average in the early years and more conservative than average in later retirement.
Both of the above funds "aim to maximize pre-retirement wealth accumulation while minimizing post-retirement longevity risk," says Phil Fontana, Head of Investment Product U.S., John Hancock Investment Management. The Multimanager Lifetime Portfolios are actively managed while the Multi-Index Lifetime Portfolios "use ETFs and low-cost active allocation strategy to minimize the impact of expenses on portfolio returns."
The third suite of target-date funds, called Multi-Index Preservation Portfolios, "are designed for participants who want to minimize their risk of loss as they near retirement and expect to withdraw and reallocate their 401k assets to generate income in retirement," Fontana says. As such, they use a "to" glidepath that is the most conservative glidepath on this list. It begins at 82% equities then flatlines at only 8% equities at retirement. Like the Multi-Index Portfolios, these use exchange-traded funds and low-cost active allocations.
"The funds use an open architecture structure and are comprised of both proprietary and third-party funds," Fontana says. "Proprietary funds undergo the same scrutiny and due diligence process as non-proprietary funds."
The multi-manager approach includes more than 20 portfolio management teams, so they provide diversification not only in the assets they hold, but also the style of management used within the funds.
Learn more about John Hancock's target-date funds at the provider site.
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JPMorgan Asset Management
JPMorgan Asset Management's suite of SmartRetirement target-date funds, which allocate 85% to equities in the early accumulation years and 32.5% equities at and in retirement, are among the most diversified in their risk profile at retirement in the industry.
Lynn Avitabile, investment specialist, Multi-Asset Solutions at JPMorgan Asset Management, says the choice to balance risk between equities and fixed income, including credit, is due to a couple reasons.
First, investors "do not want to risk having high price volatility in the years before they want to use the money." That's a wise concern given that a sharp drop in your retirement assets in the year prior to retirement could materially impact your lifestyle in retirement.
The second reason for the diversified approach is that as investors enter retirement, their probability of uneven cash flows increases as they purchase retirement homes, begin estate gifting and pre-pay assisted living facilities. "From an investment perspective, as participants approach this life stage, there is simply not enough time left to overcome negative events," Avitabile says.
The funds also de-risk faster in the years before retirement than some other funds. "In the critical near-retirement years account balances peak, and so do the potential dollar losses associated with a market downturn," Avitabile says.
JPMorgan offers two SmartRetirement lines: The traditional line, which is fully actively managed, and Blend, which uses "index strategies in asset classes perceived to be more efficient – such as U.S. equity and developed International equities – with active management in asset classes that are less easily or efficiently indexed," Avitabile says.
JPMorgan's Blend series and the aforementioned BlackRock LifePath Index series are the only two target-date fund series with a Gold Morningstar rating as of this writing.
Learn more about JPMorgan's target-date funds at the provider site.
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Through partnerships with other target-date fund providers, MassMutual has built the largest target-date offering on this list. It includes five-target date series that are only available through workplace retirement plans.
- The MassMutual RetireSmart by JPMorgan funds are "a multi-manager target date suite focused on helping plan participants reach their financial goals," says Doug Steele, head of investment management, MassMutual Funds. These funds provide "broad diversification across multiple managers, asset classes and markets." They use a "to" glidepath that moves from 91% equity to 33% equity at and through retirement.
- The MassMutual Select T. Rowe Price funds use T. Rowe Price's active management and provide "a tactical allocation process that strives to enhance returns and help mitigate risk," Steele says. With a "through" glidepath, these funds continue to de-risk throughout an investor's life. The glidepath goes from 98% equities to 55% equities at retirement, then settles at 30% equity about 30 years into retirement.
- The IndexSelect series is a low-cost, passively managed series that provides multiple "to" glidepaths based on your risk tolerance. All three versions start at 99% equities, but the Aggressive version ends at 50% equities, the Moderate at 40% equities and the Conservative at 30% equities.
- The Wilmington Trust American Funds offer "a glide path that balances market risk and longevity risk by shifting to higher-yielding lower volatility securities as the participant ages," Steele says. "The use of flexible mandates, like global and multi-asset funds, that enables bottom-up asset allocation tilts with the goal to enhance returns and help mitigate risk." These funds go from 85% equity to 45% equity at retirement, finally settling at 28% equity.
- The Legg Mason Total Advantage funds "seek outperformance potential and risk mitigation through active investment management blended with lower-cost passive solutions," Steele says. The funds leverage the expertise of 16 different asset managers to provide a managed volatility approach and underlying stable value asset class. The glidepath goes from 97% equity to 53% at retirement to 34% about 15 years into retirement.
Learn more about MassMutual's target-date funds at the provider site.
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Nuveen, the investment manager of TIAA, offers three target-date series: Lifecycle Active, Lifecycle Index and Lifecycle Blend. All three varieties "use the same glidepath construction methodology and are managed by the same long-tenured portfolio management team," says Brendan McCarthy, national sales director of DCIO (defined contribution investment only) at Nuveen. The Blend suite is only available in qualified retirement plans.
The difference is in the underlying assets used to follow those glidepaths.
The Lifecycle Active suite uses actively managed underlying funds, the Index suite uses passively managed index funds, and the Blend suite uses a combination of both. The expense ratios vary based on the level of actively managed funds used – for the most part, the more active the management, the higher the expenses.
"Our Active and Blend series are unique in the industry because they invest in direct commercial real estate, which provides important diversification benefits given its historically low correlation to equities and fixed income," McCarthy says. "In addition, commercial real estate has the potential to reduce overall portfolio volatility and provide a hedge against inflation." Real estate is included in the Lifecycle Active and Blend funds, which maintain a 5% real estate exposure from inception to the retirement target date.
All of the Lifecycle funds use a "through" glidepath that starts at 95% equity. The Index suite reduces equity exposure to 50% at retirement, while the Active and Blend funds taper down to 45% equities, 50% fixed income and 5% real estate. All three fund series land at 20% equities and 80% fixed income about 30 years into retirement.
Learn more about TIAA-CREF's target-date funds at the provider site.
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State Street's Target Retirement series, available to certain U.S. workplace retirement plan investors, uses a diverse range of underlying investment vehicles, including real estate investment trusts (REITs) and commodities, to help control for key retirement risks such as inflation.
The glidepath starts with an industry-average 90% allocation to growth assets (namely U.S. and international equities). It then shifts to 47.5% growth assets, incorporating REITs and commodities, at retirement (age 65), before ultimately landing at 35% growth assets at age 70.
The funds reach their most conservative at age 70 to help address the IRS's required minimum distribution (RMD) rules that mandate retirees begin taking withdrawals from pre-tax retirement accounts at age 72.
Using index funds enables State Street to offer one of the lowest-cost target-date funds on this list. But the company recognizes that not all indices are created equal, says Brian Murtagh, vice president, DC Investment Strategy at State Street Global Advisors.
"Index construction can meaningfully impact how the exposure translates to risk and return for your participants, so we take an 'index aware' approach," he says. This includes an annual review of the underlying funds as well as the overall glidepath "to ensure (the fund) aligns with our long-term objectives for participants of each age cohort."
Learn more about State Street's target-date funds at the provider site.
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T. Rowe Price
T. Rowe Price has been managing target-date funds since 2002. Today, the investment management firm offers two different families of target-date funds: Retirement Funds and Target Funds.
Retirement Funds are "oriented around maximizing the potential for lifetime income," says Joe Martel, portfolio specialist, Target Date Strategies at T. Rowe Price. To combat the longevity risk that comes with living for 30-plus years in retirement, these funds take a higher-than-average stock allocation of 55% equities at retirement. The portfolios then continue to de-risk all the way to age 95, Martel says.
Target Funds, on the other hand, are more focused on reducing volatility in retirement and thus follow a more conservative glidepath. These are more for someone who is less concerned about maximizing their wealth or is willing to give up some of the ability of the portfolio to support withdrawals for very long years in retirement, Martel says. These are intended for, say, someone who expects a shorter retirement or has other assets – such as a pension – they can lean on for income.
Both of the T. Rowe Price target-date fund series begin and end at the same allocation, but the Target Funds start reducing stock exposure earlier so that they are more conservatively allocated at and into retirement.
That said, T. Rowe also is transitioning its funds to a higher equity allocation before and after retirement in response to research indicating investors need more growth to achieve long-term retirement goals. Over a two-year period starting April 2020, the allocations will increase to 98% equity from 90% equity at the start, finally settling at 30% equity instead of 20% equity at the end, making them some of the more equity-heavy target-date funds available on this list.
Both types of funds use T. Rowe Price's actively managed products as their underlying investments.
Learn more about T. Rowe's target-date funds at the provider site.
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As the indexing pioneer, it's no surprise that Vanguard target-date funds use index funds to achieve their goals. "As a result, target-date investors receive access to thousands of U.S. and international stocks and bonds, including exposure to the major market sectors and segments at a cost that, on average, is 83% less than the industry average," says Martin Kleppe, head of Vanguard's index strategies team.
But while the funds are comprised of passive index funds, "Vanguard's portfolio managers take an active approach to ensure the Vanguard's target-date funds perform as expected for investors," Kleppe says. This allows portfolio managers to weigh "the tradeoffs between rebalancing with a high degree of precision against market impact and increased cost of trading," especially during market volatility.
Unlike some other firms that take a tactical approach to their glide paths, reacting to short-term market shifts and volatility, Vanguard "only makes highly strategic changes designed to improve diversification and product efficiency," Kleppe says. "Since the launch of the Vanguard Target Retirement series in 2003, we've made only four strategic changes." Those are:
- increasing equity and adding emerging markets exposure in 2006
- increasing international equity exposure and replacing the international equity index funds in 2010
- adjusting the international fixed income and short-term TIPS (Treasury Inflation-Protected Securities) allocation in 2013
- lowering cost and increasing international exposure in 2015
The funds use a "through" glidepath with a significant allocation to equities (90%) in the early savings years to capture the risk-reward premium before incrementally decreasing equity exposure to 50% at retirement. It dials down equity exposure to 30% by age 72, when investors must begin required minimum distributions (RMDs). (Previously, it was age 70.5.)
Learn more about Vanguard's target-date funds at the provider site.
Index Funds vs. Target-Date Funds: What's the Difference?
Index Funds vs. Target-Date Funds: An Overview
Choosing between index funds and target-date funds in a 401(k) is a common dilemma. The main factors in making this choice are how much investors know about financial markets and how much time they want to spend. Target-date funds provide easy-to-understand options that work reasonably well for most investors. With target-date funds, all investors need to know is when they want to retire. Index funds let people directly invest in different asset classes, which usually saves on fees and gives them more control over risk and returns.
Index funds mirror the performance of a stock or bond index, often at a low cost. Expense ratios are usually at or below 0.1% for U.S. stock and bond index funds, and they can be less than 0.2% for international assets. However, investors are left on their own. They must put these assets together in ways that minimize risks for a given level of expected returns. That's great, as long as you're interested in modern portfolio theory (MPT).
Target-date funds can use both managed and index funds to create portfolios that professional managers believe are appropriate for investors. As the target date approaches, managers reduce the allocation to risky assets, such as international stocks, and increase the portion of funds dedicated to less volatile assets like bonds. Most of the best target-date funds have expense ratios of less than 1%, and some even go below 0.1%. As a rule, target-date funds that invest in index funds tend to charge less.
- Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations.
- Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.
- Investors can combine index funds themselves to get performance similar to target-date funds and reduce fees in the process.
- Target-date funds are actively managed and periodically restructured to gradually reduce risk as the target retirement date approaches.
- Target-date funds can be riskier than most people expect, but they usually become less volatile than individual stock market index funds as the target date approaches.
Index funds are popular with both individual investors and financial professionals. They include exchange-traded funds (ETFs) and mutual funds that are created to track a specific index like the S&P 500, the Russell 2000, or the EAFE. Index funds offer broad exposure to the market and have low operating expenses.
Index funds span the gamut of stock and bond investment styles, both domestically and internationally. Others may track obscure indexes or exotic asset classes, such as Brazilian small-cap stocks. However, those types of index funds rarely appear in 401(k) plans.
An S&P 500 index fund, an international stock index fund, and a bond index fund provide enough variety to serve as the core of a diversified portfolio. Other helpful additions to the mix include small-cap stocks, mid-cap stocks, emerging market stocks, and perhaps real estate investment trusts (REITs). With access to these asset classes, investors can quickly build diversified portfolios for themselves using index funds and save money.
Like any other investment, there are risks involved in index funds. Moreover, any setback that affects the benchmark will be seen in the index fund. If you're looking for flexibility, you won't find it with an index fund, especially when it comes to reacting to price drops in the index's securities. You'll have to change the asset allocation yourself by investing in different index funds.
While most index funds are low cost, some come with a high price. For example, the Rydex S&P 500 Fund (RYSOX) has an expense ratio of 1.68%. That is astounding when you consider the fact that funds with identical holdings often charge less than 0.05%. High-cost index funds are a particular issue in 401(k) plans that contain mostly managed funds, so be sure to check the fees.
Target-date funds are worth considering if your company offers them. You can either invest all of a 401(k) account in the appropriate target-date fund or invest in a selection of the investments from the plan's full lineup.
The reason they're called target-date funds is that the assets are restructured at a future date to serve the investor's needs. Mutual fund companies frequently name the funds after the target years. The idea is that the investors will need the money that year, often for retirement purposes. Rather than having to choose a series of investments, an investor can choose one target-date fund to reach their retirement goals.
Target-date funds are in many 401(k) plans. However, company plans usually only offer access to target-date retirement funds from a single provider. Fidelity, Vanguard and T. Rowe Price are popular choices. All three use their own funds as the underlying investments. Other firms may offer different strategies, such as funds of exchange-traded funds (ETFs).
What seems like an appropriate level of risk to a fund manager might not fit your life. Look at target-date fund performance in 2008 and early 2020 to see if a given fund seems too risky.
Some investors are under the false impression that target-date funds always have lower risk than S&P 500 index funds. That is not necessarily true. These funds sometimes start by investing heavily in risky assets like emerging markets and small-cap stocks in an attempt to boost long-term returns. Fund managers reallocate holdings at regular intervals and reduce risk as the fund gets closer to its target date.
Target-date funds suffered significant losses again in 2020 after a similar episode in 2008. For example, the T. Rowe Price Target 2025 Fund (TRRVX) lost over 20% at one point during the 2020 market crash. That loss might seem excessive to some investors who are only five years away from retirement. Transferring a portion of assets to a government bond ETF is an easy way to reduce overall risk (and expected returns).
Actively managed mutual funds such as target-date funds have gotten a bad rap. In many cases, it is well deserved. However, not all actively managed funds are poor investment choices. For example, Vanguard's Wellington Fund combines reasonable fees with almost a century of strong performance. Many other managed funds also offer consistent returns, proven investing strategies, and sensible expense ratios. The real competition isn't between index funds and target-date funds. Instead, investors must choose to put their savings into a single target-date fund or several individual funds, which may be index funds or managed funds.
It is best to have an asset allocation in mind for those going this route. If the 401(k) plan is the only investment, then this account is the only one to consider. Many have other investment accounts, such as individual retirement accounts (IRAs), a spouse’s workplace retirement plan, or taxable investments. In that case, a 401(k) plan allocation is just one part of an overall portfolio.
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The 9 Best Fidelity Target Date Funds
Image source: Getty Images.
Target date funds use asset-allocation strategies to help you invest for specific future goals, such as financing your retirement. As one of the largest mutual fund companies in the business -- and as one with a substantial business providing and managing 401(k) funds -- Fidelity has a full suite of retirement funds. Dubbed the Fidelity Freedom Funds, many have long track records that make it easy to assess their success.
A few years ago, however, Fidelity made a decision to add a somewhat different sort of product to its target date fund arsenal, and these offerings give investors an advantage that could produce a big boost to their returns over time. Let's look at what are likely to become Fidelity's top target date funds.
The 9 top target date funds from Fidelity
Expense Ratio (Gross / Net)
Fidelity Freedom Index 2015 Fund
0.23% / 0.16%
Fidelity Freedom Index 2020 Fund
0.23% / 0.16%
Fidelity Freedom Index 2025 Fund
0.23% / 0.16%
Fidelity Freedom Index 2030 Fund
0.24% / 0.16%
Fidelity Freedom Index 2035 Fund
0.24% / 0.16%
Fidelity Freedom Index 2040 Fund
0.24% / 0.16%
Fidelity Freedom Index 2045 Fund
0.24% / 0.16%
Fidelity Freedom Index 2050 Fund
0.24% / 0.16%
Fidelity Freedom Index 2055 Fund
0.24% / 0.16%
Data source: Fidelity Investments.
As you can see, each of these funds has a year associated with it. The idea is that if you expect to need the money you're investing in that fund beginning in a certain year, then you should choose the target fund that is associated with that year. As an example, if you're 51 years old in 2016 and expect to retire at 65, then the 2030 version of the fund would be the natural fit for you.
What the Fidelity Freedom Index Funds invest in
What sets the Fidelity Freedom Index Funds apart from Fidelity's other target date funds is the index-based strategy that they follow. Each fund owns a combination of mutual funds in its portfolio. Those with target dates that are further in the future have a more aggressive mix of investments. Over time, the mix is gradually adjusted to a more conservative ratio, so those whose target dates are closer to the present will have shifted to a less stock-heavy asset allocation. The contents of the funds (though not their ratios) are generally the same. Fidelity went with its Total Market Index Fund for domestic stock exposure, and its Global ex U.S. Index Fund for international stocks. For bond exposure, Fidelity uses its U.S. Bond Index Fund and its Inflation-Protected Bond Index Fund. A commodity strategy fund and a money market fund round out the allocation options.
What makes each fund different is its specific allocation at any given time. For instance, right now, the 2030 fund has about 55% of its assets in U.S. stocks, 25% in international stocks, and 20% in bonds. The more conservative 2015 fund has just 40% U.S. stock exposure, 15% in international stocks, 35% in bonds, and about 10% in the money market fund. At the other end of the spectrum, the 2055 fund currently has a 90% stock and 10% bond split, with U.S. stocks accounting for almost 65% of the total portfolio and international stocks occupying the other 25% of the stock portion of the overall allocation.
The Fidelity index advantage
If you investigate Fidelity's offerings, you'll notice that it also offers non-index, actively managed Freedom Funds for each of the target dates listed above. However, the annual expenses for the corresponding funds are much higher, ranging from 0.64% for the 2015 fund to 0.77% for the 2055 fund.
So far, that cost difference hasn't produced an advantage for the index-fund-based options. And in fact, most of the actively managed funds having a slight performance edge over the past three years. However, what's particularly interesting is how the actively managed Fidelity target date funds managed to gain that marginal edge: Their asset allocations are a bit more aggressive than their index-fund-based counterparts.
For example, the 2030 active fund has 60% U.S. stock exposure and just 15% in bonds, compared to %55 stocks and 20% bonds for the index fund. Over time, that higher exposure to the stock market should give the active funds a performance advantage, but it involves greater risk that many investors won't necessarily see.
Returns are only part of the equation in investing. As smart and Foolish investor, you should also make sure to examine whether an asset adequately rewards you for the risks it carries. In this case, Fidelity's index-based target date funds do a better job of providing solid returns with a lower potential risk of declines than its corresponding actively managed offerings.