Best target-date funds: Vanguard or Fidelity?

[REWahoo]

According to Paul Merriman, the answer is Vanguard. The reason is a familiar one - cost.

Why are Fidelity expenses more than three times as high as Vanguard's for managing essentially identical portfolios? I think there are at least three important reasons.

First, Fidelity pays active fund managers to try to beat the market. These are bright, expensive employees whose compensation burdens the expense ratio of every fund except index funds. Vanguard funds have managers, of course, but their job is much simpler: To follow indexes.

Second, Fidelity must make profits for corporate shareholders. Vanguard, on the other hand, is owned by the shareholders in its funds. Operating profits go right back to those shareholders.

Third and perhaps most important, Fidelity charges higher expenses (and thus delivers lower returns) simply because it can.

Best target-date funds? Fidelity vs. Vanguard - MarketWatch

 

[karen1972]

I can tell you I owned both for the last 3 years as my 401k at work only offered Fidelity..and Vanguard, hands down returned significantly more. The performance on Fidelity was ridiculous and maybe made worse due to 401k fees at my small company...but it totally soured me on Fidelity and when I retired in February I rolled it all over into Vanguard, though took that 401k money and put it in Wellington.

 

[jerome len]

Did anyone notice that Fidelity ran an ad in the Monday WSJ that I consider misleading? Fidelity stated their index funds were cheaper than Vanguard but they compared their funds to Vanguard standard funds, ignoring the less expensive Vanguard admiral funds and Vanguard ETF index funds. Don't get me wrong, I have some money with Fidelity but most with Vanguard. Vanguard is cheaper and their target date funds have done better. Fidelity did cut target date fund costs last year but they still are more expensive.

 

[eytonxav]

"Second, Fidelity must make profits for corporate shareholders. Vanguard, on the other hand, is owned by the shareholders in its funds. Operating profits go right back to those shareholders."

This statement confuses me, as I thought Fidelity was a privately held company

 

[MBSC]

My Fidelity managed 401k offers "Pyramis Index Lifecycle Commingled Pools" with ERs of 0.10%. They seem to be Fidelity Target Date trusts for institutional investors.

 

[mrfeh]

We have most of our money w/ Fidelity, but in index funds, which are competitive w/ Vanguard.

 

[steelyman]

I remember seeing a similar comparison article that also included T. Rowe Price target date funds. That was not recent, I was still employed so it was at least 4 years ago. I don't remember the source but it was reputable, not some guy out in the Dunkin Donuts parking lot.

That article compared the "aggressiveness" of the allocations, and the conclusion ranked them (in order of most-to-least) was TRP, Vanguard, and Fidelity.

I received the proceeds of an inherited IRA a couple of years ago and had to decide what to do with that lump of money without involving a lot of work, so a target date fund seemed reasonable and since Vanguard was in the middle of the pack I chose them.

How do you choose a "target date" for an inherited IRA? I had no idea so I just picked Vanguard's 2025 fund and looked more closely. What I was interested in was letting the "pros" pick the overall stock/bond allocation (the "60/40" type thing) and I would follow whatever it was yearly, basically an annual rebalance once I got it all invested.

The 2025 fund (VTTVX) summarizes the current allocation which is essentially a "lazy man's portfolio" (nothing wrong with that): total stock, total international stock, total bond, total international bond.

I used their broadest allocation as a starting point but implemented it on my own with Fidelity funds, and I have posted about it in the "LOL!'s Market Timing Newsletter" thread.

One thing that was interesting, looking at VTTVX, is that the individual funds were invested in "Investor" class, not "Admiral" class for each of the component funds. Maybe due to the nature of small balances within the target date fund for average John Doe investors that are dollar-cost averaging through paychecks, I don't know.

 

[SumDay]

DH's Fidelity 401(k) account through his former employer includes SSgA target funds. I just double checked, and the expense ratio is .08%. Even though they provide low cost funds, I'd love to move to Vanguard, however I'm pretty stuck on that ERISA protection, which I wouldn't get with an IRA.

 

[steelyman]

DH's Fidelity 401(k) account through his former employer includes SSgA target funds. I just double checked, and the expense ratio is .08%. Even though they provide low cost funds, I'd love to move to Vanguard, however I'm pretty stuck on that ERISA protection, which I wouldn't get with an IRA.

That's interesting. The Vanguard 2025 fund lists its expense ratio as zero, but that expenses of the underlying funds are passed through.

 

[MBSC]

that's interesting. The vanguard 2025 fund lists its expense ratio as zero, but that expenses of the underlying funds are passed through.

The expenses of the underlying funds are still taken into account.

 

[steelyman]

SCGamecock - I think the annual report refers to those as "acquired fund fees/expenses".

 

[audreyh1]

"Second, Fidelity must make profits for corporate shareholders. Vanguard, on the other hand, is owned by the shareholders in its funds. Operating profits go right back to those shareholders."

This statement confuses me, as I thought Fidelity was a privately held company

It is a private company. Private companies can still have shareholders - that is how ownership is apportioned in a corporation. But it would totally be unknown what amount of profits are taken out by shareholders as opposed to being reinvested in the company, or really what the profit goals would be at all.

But that statement does make me wonder whether Paul Merriman even realizes that Fidelity is private.

 

[retirementguy1]

While Fidelity is competitive with Vanguard for index funds the following article is enough for me to choose Vanguard even if the costs are the same. Also Fidelity wouldn't offer the low expense options if it wasn't for Vanguard. Competition...


Fidelity settles lawsuits over its own 401(k) plan - Aug. 18, 2014

 

[eytonxav]

But that statement does make me wonder whether Paul Merriman even realizes that Fidelity is private.

Exactly. And further Merriman has used Vanguard for his clients for many years, and while some of his statements are likely factual, there could be some self serving bias as well.

 

[LOL!]

Fidelity has two separate sets of 'target date' or more properly Fidelity Freedom funds:

1. The older ones with actively managed funds and relative high expense ratios, and

2. The new ones with index funds and lower expense ratios.

Compare FFFDX to FPIFX.

There is yet another fund Fidelity Freedom K 2020 FFKDX which I am not sure how it fits in with the other two.

 

[steelyman]

The expenses of the underlying funds are still taken into account.

Correct. Your initial post was later edited to be more than a naked JPG image.

 

[mpeirce]

One thing that was interesting, looking at VTTVX, is that the individual funds were invested in "Investor" class, not "Admiral" class for each of the component funds. Maybe due to the nature of small balances within the target date fund for average John Doe investors that are dollar-cost averaging through paychecks, I don't know.

One thing that irks me about Vanguard is that even though I have plenty in my primary account with them to qualify for Admiral funds, the smaller ROTH I have with them doesn't qualify because they look at each account separately.

I even called them about this and they said that's just how they do it.

Seems like they should look at the total of all my investments with them.

 

[pb4uski]

It is a private company. Private companies can still have shareholders - that is how ownership is apportioned in a corporation. But it would totally be unknown what amount of profits are taken out by shareholders as opposed to being reinvested in the company, or really what the profit goals would be at all.

But that statement does make me wonder whether Paul Merriman even realizes that Fidelity is private.

He said corporate shareholders, not public shareholders. Corporate shareholders would include those of both publicly held and privately held corporations, so technically he is right (whether he knows it or not is a separate issue).

I think his point is that Fidelity's fees include a profit element to provide a return to its shareholders while Vanguard's probably include less of a profit element because it is owned by its fund shareholders.

 

[thefinancebuff]

Fidelity has two separate sets of 'target date' or more properly Fidelity Freedom funds:

1. The older ones with actively managed funds and relative high expense ratios, and

2. The new ones with index funds and lower expense ratios.

This. The author of the article apparently didn't know about Fidelity's newer Freedom Index Funds whose expense ratios are about the same as those on Vanguard funds.

 

[steelyman]

SCGamecock: I was curious about the fund or family you mentioned earlier in this thread. Would this be the management company to which you were referring?

http://pyramis.fidelity.com