While automated investment management services using ETFs get the news coverage, don’t overlook the tried-and-true target date funds. They are still a very good choice at least for the IRAs, where most people have the majority of their retirement money, and where fancy tax loss harvesting doesn’t apply.
Fidelity quietly opened up to retail investors a line of target date funds composed of index funds. Besides Vanguard, Fidelity has become a second major mutual fund company that offers target date funds based on index funds to all investors.
These funds are called Fidelity Freedom Index Funds, not to be confused with similarly named Fidelity Freedom Funds (without Index in the name). Fidelity Freedom Index Funds use index funds; the net expense ratio is 0.16%. Fidelity Freedom Funds use actively managed funds; the net expense ratios go from 0.57% to 0.78%.
Fidelity Freedom Index Funds aren’t strictly new. They had been available since 2009 but only to some 401k-type plans. Now retail investors can buy them too, say for their traditional or Roth IRA. Each fund has a target year in the name. There’s a 2015 fund for people retiring next year. There’s a 2035 fund for people retiring in 20 years, and so on.
Besides a tiny allocation to money market and commodities, Fidelity Freedom Index Funds basically allocate to three broadly diversified asset classes:
- total US stocks
- total international stocks
- total US bonds
Within stocks, US and international stocks are split roughly 70:30. In terms of asset classes covered and how US and international stocks split, they are very similar to Vanguard’s target date funds, except Vanguard also includes international bonds as 20% of the bonds allocation. The 0.16% net expense ratio is also comparable to Vanguard’s target date funds, which have an expense ratio between 0.16% and 0.18%.
The allocations to stocks over different years (the “glide paths”) are also very similar between Fidelity Freedom Index Funds and Vanguard Target Retirement Funds.
Starting at 40 years before retirement, they both peg to 90% in stocks. Vanguard stays there for 15 years. Fidelity stays there for 20 years. Then the allocation to stocks starts to drop. At the time of retirement, Fidelity has it at 55% in stocks; Vanguard has it at 50%.
With a Fidelity Freedom Index Fund or a Vanguard Target Retirement Fund, investors achieve the same deposit-and-forget efficiency as the new online services using ETFs, arguably at a lower cost with less complexity. The fund is low cost, broadly diversified, and automatically rebalanced. You have all the service infrastructure from Fidelity or Vanguard standing behind it.
I don’t see Fidelity actively market these Freedom Index Funds. If you have a Fidelity IRA, a solo 401k, or a BrokerageLink self-directed brokerage option in your employer plan, using one of these is a very attractive option. I’m going to add these to the best index funds and ETFs at Fidelity.
[Photo credit: Flickr user Adam Fagen]
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