Fidelity Expanded Offerings, Fee Reductions & Strategy Changes

Fidelity Seeks Perfect Blend in New Target-Date Funds

What do you do when you have two lines of target-date funds-of-funds, one that invests in actively managed funds and one that relies on index funds? If you’re Fidelity, blend them!

Fidelity has filed paperwork with the Securities and Exchange Commission to add 13 new target-date “Freedom Blend” funds to its existing roster of the one-stop investment options, with an expected launch date in August. The proposed new funds and their expense ratios are listed below.

Source: Fidelity.

The new funds will focus primarily on growing investors’ assets until the retirement year stated in the fund name, at which point they will seek to provide high current income with a side of additional growth. Then 10 to 19 years following the retirement year, the fund will attain an allocation similar to Freedom Blend Income, the most conservative of the product line.

Andrew Dierdorf and Brett Sumsion will co-manage the funds. Each has extensive experience managing target-date funds.

The new funds appear to seek out a middle ground between the currently existing, actively managed Fidelity Freedom funds and the passive Freedom Index funds (and share the same target dates as their sibling funds). They will invest primarily in a combination of Fidelity’s domestic and international equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. funds and 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. funds, “some of which are actively managed and others of which are passively managed,” according to the SEC filing.

While the initial filing does not give details on portfolio allocation, the combination of active funds and index funds in a portfolio is a popular strategy followed by many advisers, sometimes called a “core/satellite” approach. The idea is to build the core of a portfolio out of lower-cost index funds and then boost diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. and return potential by investing in satellite actively managed funds. It remains to be seen if this is the driving principle for these new funds.

However they are allocated, the Freedom Blend funds are a way for Fidelity to distinguish itself from other target-date-fund providers. By combining active and passive investments, the Freedom Blend funds are cheaper than Fidelity’s all-active Freedom funds.

Fidelity Lowers Freedom Index Fund Fees, Updates Investment Strategies

In conjunction with the SEC filing, the firm also announced that costs for its investor class of index target-date funds (the Freedom Index series) would be reduced slightly to 0.14% from 0.15%. Institutional class shares were cut from 0.10% to 0.08%.

The price cuts aren’t the only change for the Boston fund giant’s target-date funds. They will be making some tweaks to their target-date funds’ composition and “glide paths.”

Almost all products of this ilk follow a progressive portfolio track that sees them reduce exposure to “riskier” asset classes like stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. in favor of 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. as they get closer to their target date, gradually becoming more conservative over time. From time to time, the firm’s strategists adjust these glide paths based on their most up-to-date modeling and economic or market outlook in an attempt to improve long-term results for shareholders.

The current glide paths for Fidelity’s Freedom funds and other target-date strategies haven’t shifted since 2013, but that’s about to change. By the end of this year, Fidelity will be implementing amended glide paths that include increased exposure to long-term U.S. Treasury bonds and U.S. Treasury Inflation-Protected Securities over time—slightly reducing stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. fund exposure for investors in or near retirement—and removing commodity investments from the picture altogether for the Freedom Index funds.

Aim for Good Saving and Investing Habits, Not Target-Date Funds

While it’s certainly to shareholders’ benefit that Fidelity is marginally lowering fees on some of its target-date funds, and the blend approach is somewhat novel, we do not find these kinds of investments very compelling.

At Adviser Investments, we strongly believe that saving early and often for retirement provides the best chance to do so comfortably when the time comes. But we don’t see target-date funds as the best vehicle to get there.

Sure, we’re aware that a quick and easy single-fund solution could hold appeal for less sophisticated investors. And for new investors starting with a small sum, the relatively low minimums and fees on Fidelity’s (and Vanguard’s) target-date funds make them a handy stepping stone toward a custom-tailored portfolio down the road. When it comes to people with more at stake who have worked hard to build a retirement nest egg, there are better options to be had.

Simply put, in our experience, one-size-fits-all often adds up to a bad fit. The only question target-date fund providers ask of investors is “when do you want to retire?” And that’s the singular input when it comes to their asset allocation over time. There’s no accounting for risk toleranceThe amount of loss an investor is willing to absorb in their investment portfolio., future spending needs or other financial goals during an investor’s lifespan built in. We think those factors are too important to ignore in an investment strategy.

We believe investors are far better served by building diversified portfolios of select actively managed funds customized to their needs and goals. For that reason, we do not build one-size-fits-all portfolios. Instead, we work with our clients to create a road map to achieving their long-term objectives and meeting their lifestyle requirements with a portfolio tailored to them.

Please note: This update was prepared on Friday, July 27, 2018, prior to the market’s close.

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.

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