Tuesday, August 25, 2009

Fidelity Offers Index Fund-Based Target Retirement Funds

Here’s some good news for the many 401(k) participants with Fidelity as their plan provider. Fidelity announced that they plan to launch a series of Fidelity Freedom Index Funds to complement their current Freedom Funds as soon as September. From this WSJ Article*:

Fidelity Investments, for example, plans to launch the Fidelity Freedom Index Funds, a series of target-date index funds in five-year increments, from 2000 to 2050, in September. Strategic Advisers Inc. will invest each of the target-date funds in a combination of Fidelity index funds. Fidelity wants to provide some of its group retirement plan customers with an index alternative to its Freedom Funds, a spokeswoman said.

Jonathan Kreider, a fiduciary research analyst at Lipper Inc., said, “Especially with the market downturn over the past year, expenses are really starting to be a selling point for a lot of investors.”

It’s good to see that mutual fund companies are feeling the pressure to provide low-cost fund options to the common investor. Costs matter! Fidelity would not have done this unless they felt they were losing significant market share to Vanguard.

For comparison, check out how many funds are in their Fidelity Freedom 2040 Fund (FFFFX) below (with percentages). I just looks messy and unfocused to me, with a high probability of style overlap. The expense ratio ends up at 0.79%.

Fidelity Disciplined Equity 12.09%
Fidelity Series Large Cap Value 10.86%
Fidelity Growth Company 10.1%
Fidelity Equity-Income 10.05%
Fidelity Series All-Sector Equity 9.43%
Fidelity Series 100 Index 8.07%
Fidelity Diversified International 5.72%
Fidelity Overseas 5.7%
Fidelity High Income 4.64%
Fidelity Capital & Income 4.63%
Fidelity Series Investment Grade Bond 4.14%
Fidelity Blue Chip Growth 3.03%
Fidelity Europe 3.01%
Fidelity Small Cap Opportunities 1.69%
Fidelity Strategic Real Return 1.29%
Fidelity Series Emerging Markets 1.19%
Fidelity Total Bond 1.16%
Fidelity Small Cap Growth 1.01%
Fidelity Small Cap Value 1.01%
Fidelity Japan 0.94%
Fidelity Southeast Asia 0.25%

(I laughed at the name Fidelity Disciplined Equity. There’s Value vs. Growth, Large vs. Small, but who’d invest in Fidelity Undisciplined Equity?)

This is only an educated guess based on their existing 529 portfolios (see below), but their Fidelity Freedom Index 2040 Fund holdings might look like this, with a combined expense ratio of ~0.14%:

Fidelity Spartan Total Market Index Fund 67%
Fidelity Spartan International Index Fund 17%
Fidelity US Bond Index Fund 16%

Fidelity 529 Plan Also Add Indexed Age-Based Portfolios
The reason I found out about this change was actually via my Fidelity 529 Plan (California). Previously, they had an age-based actively managed portfolio for a total annual expense ratio of 0.50%. However, sometime in the last year or so they added an extra age-based portfolio using index funds. This is good, but I never heard it publicized (my fault probably for missing out on some fine print) and this gave them the ability to jack up the price on the actively-managed portfolio to over twice the original amount, with me paying 1.07% in fees annually. Check your statements!

* WSJ requires a paid subscription to view certain articles, but you can usually view them for free if you come from Google. If you’re not seeing the entire article, bisit this link and click on the appropriate article title.

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