Fidelity Freedom Funds

[Da Nag]

Our ER date is now 4.5 years away, and I'm in need of reducing some volatility and risk in one of our pre-tax accounts, specifically our 457 plans. Currently, our allocations are pretty aggressive in all of our pre-tax plans, which we're comfortable with - we won't start accessing most of the money for another 12-15 years.

However, we are dependent on the 457 plans when we quit our jobs...those funds will be all we have available to us for 3.5 - 4 years until our pensions kick in, and we'll likely be using the entire amount during this time, or close to it.

Fidelity handles the 401a/401k/457 plans for my employer, and we met with one of the reps during their last visit. One of the options he suggested we consider for the 457 funds, is the Fidelity Freedom 2010 Fund (FFFCX). The way it was explained to me, the fund is targeted towards a specific retirement window (2010 in this case), and the allocations within the fund get progressively more conservative as the time approaches. I like the "set it and forget it" aspect to this option, as I really don't want to worry about losing a significant amount in our 457's over the next few years. We could weather a very small loss (3-5%) in our 457's, but we'd be more comfortable if things at least kept up with inflation.

Any downsides to this fund, or these types of funds in general?

 

[samclem]

Gotta Go,

While I think tis und might be a good one for someone in your position, it doesn't necessarily meet your requirement of a max loss potential of 5%. For example, the fund lost 11% between Dec 2001 and Dec 2003.

Have you really thought about the ramifications of your low tolerance for risk? It is very difficult to stay significantly ahead of inflation if you can't tolerate having your account sometimes decrease when stocks or bonds take a dip in price.

If you really can't take the thought of ocassionally taking a small loss until the market recovers, you'd probably be better off investing in TIPS (if you can get them in your 457 plan). They are only yielding a little more than inflation right now, but they wil always keep up with inflation and will offer you a small amount of growth.(if you hold them to maturity. If you sell early or buy them through a mutual fund, all bets are off).

 

[Da Nag]

While I think tis und might be a good one for someone in your position, it doesn't necessarily meet your requirement of a max loss potential of 5%. For example, the fund lost 11% between Dec 2001 and Dec 2003.

But...wouldn't a loss like that be "acceptable" in a date targeted fund, since it happened 7+ years prior to the target date?

I've no clue what the fund mix was from 2001-2003, but to hear the rep talk about these funds, the mix would have been more aggressive then, and less so as the target date approaches.

We don't have any TIPS funds to choose from, but in the "Stable Value" section of our plan we do have "Fidelity Managed Income Portfolio II", described below. Sounds pretty low risk/low return, but I don't understand the details.

What it is
A stable value fund (not a mutual fund). It is a commingled pool of the Fidelity Group Trust for Employee Benefit Plans and is managed by Fidelity Management Trust Company (FMTC).

Goal
Seeks to preserve your principal investment while earning interest income. The fund will try to maintain a stable $1 unit price. However, the portfolio cannot guarantee this stable unit price, and its yield will fluctuate.

What it invests in
The portfolio may invest in investment contracts issued by insurance companies and other financial institutions, fixed income securities as described below, and money market funds to provide daily liquidity. Some investment contracts ("wrap contracts") are structured solely as a general debt obligation of the issuer. These contracts provide for the payment of a specified rate of interest to the portfolio and for the repayment of principal when the contract matures. Other investment contracts are purchased in conjunction with an investment by the portfolio in fixed income securities, which may include, but are not limited to, U.S. Treasury and agency bonds, corporate bonds, mortgage-backed securities, asset-backed securities and bond funds. The portfolio may also invest in futures contracts, option contracts and swap agreements. FMTC, as investment manager and trustee of the Fidelity Group Trust for Employee Benefit Plans, has claimed an exemption from registration under the Commodity Exchange Act and is not subject to registration or regulation under the Act. There is no immediate recognition of investment gains and losses on the fixed income securities. Instead, the gain or loss is recognized over time by adjusting the interest rate credited to the portfolio under the wrap contract. All investment contracts and fixed income securities purchased for the portfolio must satisfy the credit quality standards of FMTC. The investment contract and fixed income security commitments are backed solely by the financial resources of the issuer. Participant withdrawals and exchanges are paid at book value (principal and interest accrued to date) during the term of the contract. However, withdrawals prompted by certain events (e.g., an employer-initiated event such as a layoff, sale of a division, plan termination, etc.) may be paid at market value, which may be less than book value. Units of the portfolio are not guaranteed by FMTC, the plan sponsor, or insured by the FDIC. The portfolio strives to maintain a $1 unit price, but cannot guarantee that it will be able to do so, and its yield will fluctuate.

Who might want to invest in it
• Someone who wants to try for a slightly higher yield than is offered by money market funds, and who is willing to accept slightly more investment risk.
• Someone who is looking for some price stability to balance his or her more aggressive investment choices.

Thanks for the feedback,

Bill

 

[Dawg52]

Funny you mention the Freedom Funds. This is unrelated to your question but I couldn't find the yield to the funds on Fidelity's website. So I emailed them asking where I could find this information as that is important to me in evaluating the funds. (I could manually figure it but you would think it would be a stat shown on the fund details.) This is their reply:


I do understand your interest in viewing yields for Fidelity Freedom Funds. At this time, we do not have yield information for the Fidelity Freedom Funds. I agree that this information would be useful for our clients. I am taking the liberty of forwarding this as a suggestion to senior management, where it will be a catalyst for discussion about how we can address this in the future.

I am sorry to hear that you are considering investing in non-Fidelity funds because of the lack of yield information. We will be happy to discuss this with you if you are interested. Feel free to send me your phone number and a good time to reach you, or if you prefer, contact Investments at: blah blah blah


A nice polite response but good grief, whats up? It appears as though Vanguard's Target fund yields are higher so maybe that is the reason.

 

[samclem]

Bill,
The Fidelity Freedom 2010 fund holds a little over 50% equities now, and it appears it will have approx 50% in 2010 (if they keep their allocation the same as the 2005 fund). With a 50% allocation to stocks, even a well diversified one, there wil be years when the value of your investment will decline by more than 5%. Some years it could decline more than 10%, especially if bonds are also taking a hit (an environment of very high inflation could make this happen, fr example)

The "Stable Value" fund will not react strongly to stock market ups and downs, but it has less potental for long term real growth (that is, growth that exceeds the rate of inflation) than would a mutual fud that has a higher % dedicated to stocks.

Of course, I don't know your situation, but what I'm suggesting is that your limited willingness/ability to accept a decrease in your account value will seriously decrease your ability to have this money grow in relation to inflation. The Fidelity Freedom 2010 Fund might be great fund for you in the long term, if you can accept the fact that it might drop n value some years and if you can commit to not selling when it does drop. If you can't take this volatility, then maybe the Stable Value fund would be better. It just probably won't produce as high an average return (over many years) as a fund holding more stocks (e.g. the 2010 fund).

Every fund decision needs to be considered as it relates to your total portfolio/financial situation.