Home Adviser Fund Update Fidelity Debuts IRA Match Published March 13, 2015 Vanguard Makes Changes to Funds-of-Funds At the end of February, Vanguard announced several changes to its Target Retirement and STAR LifeStrategy funds. First, Vanguard is rolling out a new Institutional Target Retirement lineup. The new funds, expected to launch at the end of June, will be available for large retirement plans with over $100 million in assets, and are expected to charge 0.10% in annual operating expenses. (The current Target Retirement series charges 0.16% to 0.18%.) Otherwise the new lineup should look essentially identical to the old series. We’ve wondered in the past why Vanguard didn’t use the least expensive share classes of its funds in many retirement plans. The firm may now be making a move in that direction, but in this case, investors will only benefit if they work for companies with plans large enough to qualify for the new funds—employees of mid-sized and small companies will be stuck with the more costly investor shares. Secondly, Vanguard’s investment management committee has decided to increase its allocations to Total International StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Index and Total International BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Index in its various funds-of-funds, raising its total exposure to foreign stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. to 40% of equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. assets (from 30% previously) and exposure to foreign bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. to 30% (from 20%) of the overall fixed-income sleeve. While we agree that an allocation to foreign securities is a critical element of a well-diversified portfolio, a 40% stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. slice is a big one, and well in excess of what Vanguard has recommended in the past. The change marks the fourth reallocation of assets since the Target funds opened in 2003, suggesting that Vanguard agrees with our opinion that there is no single “right” track to investing before or during retirement, and that investors should be prepared to make allocation changes over time as market conditions shift. However, we believe that investors can do better than Vanguard’s Target Retirement lineup by working with a trusted financial adviser to build portfolios tailored specifically to their investment goals and riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. comfort zones. Vanguard Enters Alternative Space On February 27, Vanguard filed registration papers for the Vanguard Alternative Strategies fund, scheduled to open in late May. The fund has the option of using long-short strategies, event-driven investing, strategies aimed at capturing mispricing in the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. markets, as well as investments in commodity contracts and currencies. Alternative Strategies will be managed by Michael Roach, a portfolio manager in Vanguard’s Quantitative EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Group, who is expected to use leverage to amplify the investments in the fund. This move might come as a surprise to Vanguard investors and followers—the firm has criticized the alternative space as being overpriced and inappropriate for most people in the past. Vanguard has done its best to address the latter of those two issues by placing a $250,000 minimum on the fund, putting it out of the reach of most individual investors. It’s also projected to charge 1.10% a year in expenses—high for Vanguard, but considerably below the average alternative fund’s 1.90% in fees, according to Morningstar. Furthermore, Alternative Strategies is being launched primarily for use in Vanguard’s Managed Payout fund, which already invests in commodities through a special internal fund at Vanguard, and long-short strategies through Vanguard’s Market Neutral fund. Managed Payout will put 10% of its assets into Alternative Strategies, which Vanguard expects will raise that fund’s expense ratio to 0.42% from 0.34%. We expect that Market Neutral will eventually be dropped from Managed Payout in lieu of the new fund. It will be interesting to see how Vanguard approaches the alternative space, but we’re happy to observe from afar. Fidelity Launches IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. Match Program In late February, Fidelity announced its new IRA Match program, which is designed to give IRA investors a helping hand as a reward for moving their accounts to Fidelity’s platform. The program is intended to mimic the matched employer contribution in many 401(k) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn.. However, Fidelity’s version, instead of matching equal sums up to a certain percentage of salary, will prorate its deposits into investor accounts based on the overall IRA account size—up to 10% of the annual contribution amount for three years. So if you qualify for the maximum “match” of 10%, a $5,500 contribution would get a $550 boost from Fidelity, for example. (Note that Fidelity’s contribution does not count against the annual limit for IRAs; the IRS will regard it as interest earned within the account. This means that investors who can afford to contribute the maximum of $5,500 for tax years 2014 and 2015—$6,500 if they are over 50—could legally exceed the limit with Fidelity’s help.) The firm says the initiative came out of a desire to motivate investors to save and contribute regularly for retirement, noting the success of employer matching programs. Obviously, Fidelity will also benefit from new or increased client assets on its brokerage platform and the annual fees collected from them. Fidelity’s IRA Match is available to new or existing retail customers who transfer any Roth, traditional or rolloverThe process of transferring funds from one retirement account to another, typically without incurring a tax. IRA to Fidelity. (Advisory clients are not eligible, nor are direct rolloversThe process of transferring funds from one retirement account to another, typically without incurring a tax. from 401(k) or 403(b) plans, and newly created IRA accounts are also excluded.) For the three years after coming aboard, Fidelity will match contributions based on the reward tiers below. Fidelity’s IRA Match Tiers Account Size Matched % of Annual Investor Contributions $10,000 1.0% $50,000 1.5% $100,000 2.5% $250,000 5.0% $500,000 10.0% Source: Fidelity. As we’ve said many times, every penny counts when it’s being saved in an investment vehicle with the tax-deferred compounding power of an IRA. Getting extra bang for your buck on Fidelity’s dime is icing on the cake. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. Our minimum account size is $350,000. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. 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