Fido still sports a few funds with long impressive track records. Of course, they should have at least a few good track records since they have 259 funds. Exactly 12 of Fido's funds (or less than 5%) have earned a 5-star rating from Morningstar. I could see how it would be an easy sell for Fidelity to convince investors to plunk money into their Fidelity Freedom line of target date retirement funds. Just pick one Freedom fund and Fidelity will allocate your money among the many good Fidelity funds for you. Unfortunately, Fidelity does not do that. Instead, Fidelity abuses the Fidelity Freedom target date mutual fund shareholders by using their money as seed money to start new and untested funds with expense ratios much, much higher than the Fidelity Spartan Index Funds.
I've always wondered, "how Fidelity could possibly grow to 259 mutual funds?" I never could figure out why anyone would invest in a new and untested Fidelity fund when you could place your money with Will Danoff in the Fidelity Contrafund or Joel Tillinghast's Fidelity Low-Priced Stock Fund. Both gentlemen have managed their funds for more than 20 years and both sport impressive index-beating track records. Or better yet, why not put your money in the very low cost Fidelity Spartan Index Funds? Then, you won't have to keep tabs on Will and Joel's own retirement plans and can focus on your own.
I have finally figured out Fidelity's dirty little secret for funding the launch of new and untested mutual funds. The Fidelity Freedom target date funds allocate money to Fidelity's new funds. I took a close look at Fidelity Freedom 2035 Fund and was shocked to discover:
- Money is allocated among 20 different Fidelity funds.
- No allocation to the impressive Contrafund.
- No allocation to the impressive Low-Priced Stock Fund.
- No allocation to the low cost Spartan Index funds.
- 19 out of the 20 funds are high cost active management funds.
- Only 1 of the 20 funds has a 10-year record that beats an index fund!
- Only 3 out of 20 have even been in existence for 10 years!
- Only 5 out of 20 are more than 5 years old.
- Half of the 20 funds are less than 3 years old!
- 5 out of the 20 funds are less than 1 year old!
- The 3 largest fund allocations go to funds that are just 3 years old.
- 70% of the fund is allocated to funds that did not exist prior to 2008!
- Freedom 2035 only owns 1 fund rated 5-stars by Morningstar.
If your 401(k) is with Fidelity, I recommend building a low-cost portfolio with the following excellent funds:
Fidelity Spartan 500 Index Fund
Fidelity Spartan Extended Market Index Fund
Fidelity Spartan International Index Fund
Fidelity Spartan US Bond Index Fund
Fidelity Spartan Long Term Treasury Bond Index Fund
Fidelity Four-in-One Index Fund
Fidelity Inflation-Protected Bond Fund
All of the above funds have very low expense ratios (0.07% to 0.23%) except the Inflation-Protected Bond Fund which is a bit higher at 0.45%.
If you don't know how to allocate your money among the excellent funds listed above, spend just 15 minutes with my book, "The 401(k) Cookbook" to create an investment recipe that works for you.
Also, don't be confused by the "Fidelity Income Replacement" dated funds. These funds are for folks already retired and the dates are NOT retirement dates. For example, the Fidelity Freedom 2035 fund is allocated 80/20 in its stock/bond split, while the Fidelity Income Replacement 2034 fund is allocated 55/45 in its stock/bond split.
Fidelity also has a series of asset allocation funds called "Fidelity Asset Manager," but with expense ratios around 0.84%, they are even more expensive than the Freedom funds.