Fidelity Freedom Funds Review: Avoid High Cost Target Date Retirement Funds

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Updated and revised. Fidelity Investments does a lot of things well, but their Fidelity Freedom series of target-date retirement funds is not one of them. I’ve been warning people about these funds since 2006, although recently they’ve been getting some heat due to their overall underperformance. Assets in the Freedom funds have been dropping, while the assets in Vanguard’s Target Retirement funds have been increasing quickly. Here’s why the underperformance is not about the glide path, but about the structure and fees.

This post is a bit long, so here’s a roadmap of what I’m going to try and show:

(1) The goal of owning actively-managed mutual funds is to beat their passive benchmark. Pick the winners and not the losers. The problem is that Fidelity Freedom funds hold so many different funds with overlapping holdings, that in the end they basically own everything. It’s exceedingly difficult for them to accomplish such outperformance. Thus, over time their performance before fees is likely to simply match that of their benchmark.

(2) Due to their higher expenses, this means that their net performance after fees (what investors actually get) will be very likely to underperform the their benchmark. Over long periods of time, the amount of underperformance will closely match the amount of management fees charged.

(3) This expected underperformance is confirmed by looking at their historical performance over the past 3, 5, and 10 years.

(4) Instead, investors should look for low-cost index funds to replicate the benchmark give the best chance of higher performance. Options are explored.

Fidelity Freedom Holdings

Here are some sample Fidelity Freedom funds and their respective ticker symbols:

Fidelity Freedom 2030 Fund (FFFEX)
Fidelity Freedom 2035 Fund (FFTHX)
Fidelity Freedom 2040 Fund (FFFFX)
Fidelity Freedom 2045 Fund (FFFGX)
Fidelity Freedom 2050 Fund (FFFHX)

If you look at the fund prospectus for any of these, you’ll see that every fund holds a little bit over 25 different mutual funds listed below. With so many funds that cover all the asset classes and so many different advisors, in the end the holdings will tend to mimic that of an index fund. There is no focused “bet” that would create a winning strategy. Too many cooks in the kitchen.

Perhaps they want to seem “diversified”. However, for example the 2030 fund only holds 0.36% of assets in the Fidelity Series Intrinsic Opportunities Fund, 0.58% in the Fidelity Series Real Estate Income Fund 0.58%. What’s the point?

US Equity Funds
Fidelity Growth Company Fund
Fidelity Series All-Sector Equity Fund
Fidelity Series Large Cap Value Fund
Fidelity Blue Chip Growth Fund
Fidelity Series Stock Selector Large Cap Value Fund
Fidelity Series Equity-Income Fund
Fidelity Series Opportunistic Insights Fund
Fidelity Series Small Cap Opportunities Fund
Fidelity Series Mega Cap Fund
Fidelity Series 100 Index Fund
Fidelity Small Cap Value Fund
Fidelity Disciplined Equity Fund
Fidelity Small Cap Growth Fund
Fidelity Series Real Estate Equity Fund
Fidelity Series Intrinsic Opportunities Fund

Commodity Funds
Fidelity Series Commodity Strategy Fund

International Equity Funds
Fidelity Series International Value Fund
Fidelity Series International Growth Fund
Fidelity Series Emerging Markets Fund
Fidelity Series International Small Cap Fund

Bond Funds
Fidelity Series Investment Grade Bond Fund
Fidelity Series Inflation-Protected Bond Index Fund
Fidelity Series High Income Fund
Fidelity Series Floating Rate High Income Fund
Fidelity Series Emerging Markets Debt Fund
Fidelity Series Real Estate Income Fund

Proper Benchmark

Even though Fidelity lists them for you, don’t make the mistake of comparing the returns of these funds to the S&P 500. Each one holds a mix of US stocks, international stocks, and bonds. Fidelity properly provides custom benchmarks like the Fidelity Freedom 2040 Composite Index which use well-recognized indexes to match the overall asset allocation.

Fidelity Freedom 2040 Composite Index is a hypothetical combination of the following unmanaged indices: the Dow Jones U.S. Total Stock Market Index, the MSCI EAFE Index (Europe, Australasia, Far East), and the Barclays U.S. Aggregate Bond Index. The index weightings are adjusted monthly to reflect the fund’s changing asset allocations.


If the theory that the funds end up simply tracking their benchmark is correct, then over the long run the funds will simply lag by the amount of their annual expense ratios, which are 0.71% and 0.75% respectively (slightly lower than a few years ago). Over the short term, there will be more noise and the Freedom funds may beat or lag the benchmark.

Here are the actual historical performance numbers of the Fidelity 2030 and 2040 funds (as of 1/31/2013). I added in the annual difference in red.

Fidelity Freedom 2030 Fund (FFFEX)

Fidelity Freedom 2040 Fund (FFFFX)

Do you see any “alpha” or benefit from Fidelity’s attempts at active-management? The Freedom funds have lagged their benchmarks consistently by more than their expense ratio.

Conclusion and Alternatives

As the time period lengthens, the amount that the Freedom funds lag their benchmark seems to converge toward their historical average expense ratio of about 0.80%. I would expect similar results for other target-dated funds that simply include a mishmash of the fund family’s existing funds. Fidelity Freedom funds are like the mystery soup or meatloaf that cafeterias serve at the end of the week, where they just put in all the unsold leftovers before they spoil. Don’t buy them.

In 2009, Fidelity quietly announced the introduction of their Fidelity Freedom Index Funds, which primarily hold just three low-cost index funds – a US fund, an international fund, and a US bond fund. Annual expense ratios are around 0.20%. However, apparently Fidelity hates them because you can’t find any information about them on their website, and they continue to be unavailable for purchase by retail investors. Instead, they are only available inside select workplace retirement plans. If you only have a choice between the regular Fidelity Freedom and the Freedom Index series of funds, definitely choose the Index ones.

Otherwise, if you are stuck inside a 401(k) or similar plan with limited investment choices, do the best you can using whatever lowest-cost options are available. If you have Fidelity Spartan index funds available, create a portfolio out of those. In my case, I used to cobble together a portfolio of an in-house S&P 500 index fund, the Vanguard Total International index fund, and an institutional share class of the PIMCO Total Return fund with a relatively low expense ratio. If you can roll over your assets into an IRA and still want a simple all-in-one fund, I recommend to my own family the Vanguard Target Retirement series of funds.

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  1. Jonathan,
    Here’s a quick question for you. I have a 403B. I’m investing fully my 5000 in my roth ira with vanguard , and almost fully in my 403B. Vanguard won’t allow me to do a roth403B. Do you think there is any merit in paying more in fees to do a roth403b with another company for the implied advantage of being in a roth? All things being equal, would you pay extra money “gambling” that tax rates will go up a lot 30 years from now, and if so how much of a percentage? I’m assuming my income will be the same now as in retirement.

  2. Jonathan,
    Thank you for the informative post. If I need to really pick the Fidelity Freedom Index Funds, what funds can I pick to mimick a Target date retirement fund? Would FBIFX be similar to FFFFX, but with a lower expense ratio? Please advise.

  3. Fidelity: A case study in the triumph of marketing over substance. Avoid buying any investment that is sold with glossy prime-time TV commercials (i.e., the “green line” ads). You are paying for those commercials out of the inflated management fees. Ignorance feels good, especially when ignorance is sold as “being responsible about your financial future.”

    The same advice goes for foods, clothes, and virtually any other product or service. Hunt down those with a good reputation that have minimal advertising (i.e., Vanguard). In my experience the quality is often better while the price is often lower.

  4. Actually Vanguard seeks to offset its fees and expenses by generating other income, primarily through securities lending activities, and has done pretty well at meeting the index performance with their net return in many products.

  5. @David – I’m a little confused as to what you’re asking. How would you open a Roth 403b with another company? Are you working for two different companies?

    If that’s the case, it would depend on the additional fees and your tax rate outlook? If your tax rate is really low right now and you expect it to be higher in withdrawal, then perhaps.

    @Sudee – That’s a great question, one that I should follow up on in more detail. In general, using the Freedom Index fund with the same target date should provide the same overall asset allocation with lower fees.

    Per Morningstar… Fidelity Freedom Index 2040 W (FBIFX) has 52% US stock, 21% International stock, and 27% bonds/cash. Fidelity Freedom 2040 (FFFFX) has 50% US stock, 26% international, and 24% bonds/cash.

    You can see this using either the Fidelity website or Morningstar website and clicking on the “Portfolio” tab.

    @Andy – Yep, Vanguard has definitely shown some indexing skill, but I don’t know if I would count on that in the future. In any case, it’s a nice bonus 🙂

  6. Hi Jonathan,
    Thanks for such a detailed look at the target date retirement funds. Do you have any opinion on TD Amerivest portfolio guidance? I have a new rollover IRA with TD Ameritrade and I am looking trying understand that value of portfolio guidance such as that.

    Personally, I have never used professional investment advice and am a big believer in long-term investing in a diversified portfolio using ETF and Index Funds.

  7. Jonathan, what do you think of the T. Rowe Price target retirement funds? The returns seem consistently above average; and the funds are regularly plugged by the journalists for the major financial publications (i.e., such as Kiplinger’s). The expense ratios are certainly higher than Vanguard, but the yields are also consistently better. Case in point, the 2035 funds: TRRJX shows a 5-year return of 3.75%, 3-year return of -1.85%, and a 1-year return of 15.42%, while VTTHX shows a 5-year return of 3.14%, a 3-year return of -2.78%, and a 1-year return of 13.33%. Similarly, Price shows better returns for more conservative targets like 2015. The low cost strategy doesn’t seem to win in this match up.

  8. Jonathan, would you happen to know if Vanguard offers similar indexed target retirement funds? Please advise.

  9. @RD – I have looked Amerivest before, but it was a while ago (2006).

    Ameritrade recently announced commission-free trades on 100 ETFs includes several good low-cost index ETFs:

    @Pedro – I think TRP does a pretty good job overall at the actively manged game. They keep expenses below average, and their track record of lower turnover, lower overlap, and other aspects is good.

    With regards to their Target funds, you have to look under the hood. TRP funds hold different asset allocations over time than Vanguard funds, and that could be the major determinant in return (and risk taken) – as opposed to stock-picking skill. More info here:

    In any case, I am looking at a graph comparing the two 2040 funds and the long-term performance seems pretty similar. Over time, I would still take the Vanguard bet after adjusting for asset allocation.

    @Sudee – Yes, the Vanguard Target Retirement Fund series all consist of index funds (except maybe the TIPS funds which is still low cost).

  10. Does that mean Vanguard Target Retirement Fund series are all index funds like the Fidelity Freedom Index Funds that Fidelity is now rolling out? I was under the impression that Vanguard Target Retirement Fund were similar to Fidelity Freedom funds & was hoping that Vanguard would roll out a new series of Vanguard Target Retirement Index funds like Fidelity Freedom Index funds. Please comment.

  11. Jonathan, your point is taken, at least regarding investing more money in a likely-to-underperform target date retirement fund. Do you have advice regarding dollars already invested in such funds? Is it an even worse move to try to convert to something else now, since the funds were probably purchased at greater cost than they are worth now?

  12. @Kenneth – Well, having lost money on the investment is already a sunken cost, it shouldn’t keep you from selling now. If held in a taxable account, you might have a capital loss tax deduction. If you had a gain, then it might be a bit tricky since you’d owe taxes. If held in a tax-sheltered account, then there are no such tax concerns.

  13. Great post. Just recently, I got my firm to add to its basket of options a number of index funds. Just as you said, the firm’s only options when I joined were these Fidelity mutual funds, with high fees and mediocre performance. I did some calculations that suggested using a mutual fund like this instead of an index fund could result, upon retirement, in as much as $1,000 less in monthly income. That was simply the result of the mutual fund’s high costs relative to index funds. Thanks for the post.

  14. terry lindorff says

    Currently I am investing in an IRA account with American funds, my work has 401k`s through fidility offering the Freedom funds, would I be better served putting all my money in the American funds or start a investing in the Freedom funds?

  15. hey Jonathan,
    Thanks for this analysis, it is timely.
    I wonder if you could comment on fees in Fidelity Freedom funds versus the “K” freedom funds; e.g. 2035 Fund FFTHX vs. FKTHX.
    The prosepectus for the regular one says Total expenses = 0.81%
    For the K one Total expenses = 0.05 + 0.56 = 0.61%

    But wait, it gets more interesting: in my plan, for untold reasons, when i look at the fees for FKTHX it says expense ratio = 0.61% (as expected) but then it says expense ratio after reductions as of 09/30/201 = 0.05%

    So, would these funds make sense were it not for the expenses?

    And something that sort of nags at me — what about the expenses of the underlying funds, where do those expenses show up?

  16. @Ed – Fidelity Freedom K Funds appear to be institutional versions of the retail Freedom funds, available in certain 401k plans and cheaper than the retail versions. I’m not sure about what reductions would lead to the expense ratio being so low as just 0.05%, unless perhaps your company is paying for it?

    If the expenses are really that low, they might be worth holding as the best available options (since I don’t know the other options).

    I would need to check the prospectus to make sure the stated expenses include the expenses of the underlying funds. They usually do for Fidelity.

  17. Thanks for this article Jonathan. I’ve been reading articles from your site off and on during school. I finished school and finally started working last year and was able to contribute 5K to my very first Roth IRA through Fidelity. I’m still trying to figure out what to invest that money into and this article definitely helps point me in the right direction.

  18. Hello Jonathan, I am 90% out and need to understand which funds to go back in to expect good growth with good timings.
    Where I am out now all theses funds have touched their peak, and not sure about ones where I never in.

    Q. Do you think these fund will still move highe or will see a nose dive as I can’t understand if these fund which are at their max average can go higher without problem.
    Do you see any which are good choice to go in again at these values.
    Please list any that you think are still have potential.(If you know any other Fidelity fund please list.). Which are good for 401 and 403b.
    I hope you’ll give advise and a good list.

    Invested and now out:
    Fidelity Contrafund

    Never invested:
    Fidelity International Discovery Fund

  19. How about the individual investor? It appears that the Freedom Index Funds are only available to employer sponsored plans. Is that true or has anything else been offered one wouldn’t know about?

  20. Hi unfortunately worked 18 years and never invested in a retirement plan. Now at 45 and a new career would like to start off in the right direction. My company offers the 403b Fidelity and Vanguard. Can you please help me to chose a and funds to best suit my retirement needs. HELP!

  21. One of the best things that I did this past year was to take my rollover IRA money out from Fidelity 2035 target fund that i had put in about 8 years ago. It pretty much sat there at the same amount the entire time.

    I still have the rollover IRA with fidelity since I really like their website and how useful it is but I put the money instead in an emerging market fund (one of the fidelity’s No-fee/commission mutual funds). So far, it has gone up almost $2,000 with just dividends, etc.

    I am also telling my mom to take her money out of target funds with fidelity and use other great funds that fidelity has to offer (Fidelity contrafund, for example).

    Great article, as always, Jonathan

  22. retirement homes NSW says

    Excellent article Jonathan. Thanks for sharing this interesting and informative post. Very well thought out!!

  23. I am a huge fan of vanguard because of their unbelievably low expense ratio and long history of investment.However,they seem to be suffering from the same problem as you mentioned above.Most of their funds overlap eachother and it is very crowded in US Large Cap sector.Not really sure if you have done same kind of case study with Vanguard,couldn’t find any post related to that.It would be nice if you can do the same on vanguard or point me to a good article/post.Thanks.

  24. Hey Jonathon,

    You query with “What’s the point?” in reference to Fidelity putting very small percentages into a few less-known options among so many funds. But I think you eluded to the real reason later with the “meatloaf in the cafeteria” concept.

    I believe it’s a way for Fidelity to gather more assets into many funds where they would like to show better numbers. Just my humble opinion for what little it’s worth.

  25. Hi Jonathan,

    I have been investing (dollar cost averaging) in my ROTH IRA using the Fidelity 2040 since 2004 and have build up a sizable portfolio with overall gains of 25% (Dividends reinvested). However as you pointed out I feel their expense ratio is very high compared to Vanguards so I am thinking of moving over the account to a Vanguard target fund.

    Do you think it’s a good idea to liquidate my positions in Fidelity and start over at Vanguard ? My concern is that I will be losing all the positions that I had built up when the market was down. The reason the portfolio is doing well is primarily because more shares were bought during the market corrections. I had originally planned to invest in Vanguard back in 2004 but they didn’t have the target retirement accounts back then.

  26. Jonathon,
    So if i am understanding you if you have an account at Fidelity that included the Freedom Funds you would recommend selling them and getting the Fidelity Spartan index funds or better yet getting the Vanguard Target Retirement 2045 Fund Investor through Fidelity as the exp ratio is .18?

  27. @ashish – Vanguard does have a lot of funds these days (often to please institutional investors), but their Target Retirement funds are pretty simple and don’t suffer from overlap. Inside most Target Retirement funds are just 3 funds: Total US, Total International, and Total US Bond. (Total International Bond to be added shortly.)

    @Jack – I agree. I think it’s also to give off the appearance of diversification (‘ooo look at all those shiny parts, must be complex and fancy!”)

    @BobNj75 – If it’s inside a Roth IRA, you don’t have to worry about capital gains. You could just roll your assets over to Vanguard without any tax issues. Other than taxes, what’s past is past and don’t worry about losing past positions. You’ll be able to sell at your current high price, and just buy Vanguard shares using that money.

  28. @Scott – If you have your Freedom funds in an IRA at Fidelity, you would have to pay a commission every time you traded a Vanguard fund there. If you rolled over your assets into a Vanguard IRA, you could buy the Target Retirement funds with no commission fees and enjoy the low ongoing expense ratio. I’ve helped my family roll over assets to Vanguard – it’s quite easy. You can even call them up and they’ll help you with the process. Good luck!

  29. I agree with your comments on the Target Funds, never really been a fan. I do like the 4 in 1 fund, FFNOX. It is one of the best funds they have (IMHO)


    • I’m current transitioning from contractor to permanent , and I just checked out their 401k plan. It’s with Fidelity and the options are limited. The only index fund is the Spartan 500 , they have the Freedom Funds(non index) as well. I was putting my money into an IRA using the Fidelity Four in One Index fund thanks to the income limits being waived due to lack of an employer retirement plan. That will not be the case in the near future.

      Anyways, I’ll see if I can cook up something using the Spartan 500 and their other funds, but I’m sad that there isn’t an FFNOX or any Vanguard options in the plan. I am huge fan of Vanguard, but I’m also a huge fan of 401k’s and employer matching.

  30. @BobNj75 — i’m in the process of transferring two (small-ish) roth ira account at fidelity to Vanguard; as part of a goal of consolidating account, and i like the Vanguard choices better.
    One thing that irritates me is fidelity charges $50 per account to close.
    (p.s. Scottrade charges $75).
    Of course nobody charges to open an account! it’s just a ploy.

    I think i read somewhere on Vanguard’s site (or the rep told me?), that Vanguard NEVER charges to close an account

  31. Jonathan M says

    I recently terminated employment at Verizon Wireless and I am going into real estate. I need a “hands off” investment and am not sure what to do with my 401k. I have little knowledge on this matter and my Fidelity adviser is advising to rollover in a roth IRA Freedom Fund. From reading the past posts, this looks like the wrong move. Please, push me in the right direction. Thank you sincerely.

  32. Gaius Gracchus says

    Thank you for posting this. I much prefer Vanguard (as would anyone), but Fidelity is what I’m stuck with at work. I really appreciate your info here.

  33. fiveminutemajor says

    Mutual funds are bad investments in general. I’ve read the stat that 85% fail to outperform the market. Why is that? Fees play a big part. If one wants to passively invest, the general market index funds (SPY & QQQ) are a good way to go.

    These retirement targeted funds are way too conservative. For instance, the 2035 (20 years out) has 15% in bonds. In any 20 year period since the Great Depression, equities have substantially outperformed fixed income securities. Add to that you have to plan not just to your retirement date, but 20-30 years beyond, and there is no way you should have any money in fixed assets if you are in your mid 40s. But, people unfortunately invest not based on historical data but the fear that the financial industry instills in people.

    With Fidelity Freedom funds in particular, they also have put substantial weight in international. Why? So many US based companies operate all over the world today. Why take on that extra geopolitical and currency risk when you can just ensure you’ve got many multinational, US based companies in your portfolio. Companies that you know and are familiar with.

    As a result, the Freedom Fund 2035 fund in particular has underperformed the S&P 5% annually. Quantify that impact over many years with compounding of interest. It’s staggering.

    Limitations around what most people can invest in in their company 401(k)’s is a real racket. Protectionism of the big financial firms.

    I’d recommend people take some time and take an interest in your financial future by learning about investing and going at it yourself. Or deciding it’s not for you and instead just putting your wealth into the very low fee index funds I mentioned below.

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