Fidelity Offers Index Fund-Based Target Retirement Funds

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Here’s some good news for the many 401(k) participants with Fidelity as their plan provider. Fidelity announced that they plan to launch a series of Fidelity Freedom Index Funds to complement their current Freedom Funds as soon as September. From this WSJ Article*:

Fidelity Investments, for example, plans to launch the Fidelity Freedom Index Funds, a series of target-date index funds in five-year increments, from 2000 to 2050, in September. Strategic Advisers Inc. will invest each of the target-date funds in a combination of Fidelity index funds. Fidelity wants to provide some of its group retirement plan customers with an index alternative to its Freedom Funds, a spokeswoman said.

Jonathan Kreider, a fiduciary research analyst at Lipper Inc., said, “Especially with the market downturn over the past year, expenses are really starting to be a selling point for a lot of investors.”

It’s good to see that mutual fund companies are feeling the pressure to provide low-cost fund options to the common investor. Costs matter! Fidelity would not have done this unless they felt they were losing significant market share to Vanguard.

For comparison, check out how many funds are in their Fidelity Freedom 2040 Fund (FFFFX) below (with percentages). I just looks messy and unfocused to me, with a high probability of style overlap. The expense ratio ends up at 0.79%.

Fidelity Disciplined Equity 12.09%
Fidelity Series Large Cap Value 10.86%
Fidelity Growth Company 10.1%
Fidelity Equity-Income 10.05%
Fidelity Series All-Sector Equity 9.43%
Fidelity Series 100 Index 8.07%
Fidelity Diversified International 5.72%
Fidelity Overseas 5.7%
Fidelity High Income 4.64%
Fidelity Capital & Income 4.63%
Fidelity Series Investment Grade Bond 4.14%
Fidelity Blue Chip Growth 3.03%
Fidelity Europe 3.01%
Fidelity Small Cap Opportunities 1.69%
Fidelity Strategic Real Return 1.29%
Fidelity Series Emerging Markets 1.19%
Fidelity Total Bond 1.16%
Fidelity Small Cap Growth 1.01%
Fidelity Small Cap Value 1.01%
Fidelity Japan 0.94%
Fidelity Southeast Asia 0.25%

(I laughed at the name Fidelity Disciplined Equity. There’s Value vs. Growth, Large vs. Small, but who’d invest in Fidelity Undisciplined Equity?)

This is only an educated guess based on their new 529 portfolios, but their Fidelity Freedom Index 2040 Fund holdings might look like this, with a combined expense ratio of ~0.14%:

Fidelity Spartan Total Market Index Fund 67%
Fidelity Spartan International Index Fund 17%
Fidelity US Bond Index Fund 16%

Fidelity 529 Plan Also Add Indexed Age-Based Portfolios
The reason I found out about this change was actually via my Fidelity 529 Plan (California). Previously, they had an age-based actively managed portfolio for a total annual expense ratio of 0.50%. However, sometime in the last year or so they added an extra age-based portfolio using index funds. This is good, but I never heard it publicized (my fault probably for missing out on some fine print) and this gave them the ability to jack up the price on the actively-managed portfolio to over twice the original amount, with me paying 1.07% in fees annually. Check your statements!

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  1. I would imagine there would be more than 3 funds in the index life cycle portfolio, and if they add sector indexes like high yield and emerging markets, that should push the fees up somewhat. I think that the 3 fund plan would be ideal if the investor is only looking for the cheapest diversification.

    I wonder when life cycle funds will begin to add other asset classes to their portfolios besides just stocks and bonds.

  2. Jeremy Olexa says

    I couldn’t tell from the article. Will they offer index-based funds for non-401k holders too?

  3. I’m not sure the Index option in the California 529 was fine print. I’ve been in the age-based Index fund for about 3 years, and it was just another option on the application form.

  4. This is great! Or is it? I’ve been perturbed that Fidelity did not have index fund options ever since I signed up for my 401k (or rather, since I heard how great index funds were). I didn’t really know what I was doing when I first chose my funds, so I chose a variety, but should I plan on switching over to their age-appropriate index fund now?

  5. @Fern,

    Fidelity has offered a number of index funds (FSMKX, FSEMX, FSIIX, FLBIX, etc.) but they may not be available to you through your 401k plan.

    When I finally understood the wisdom of index funds rather than sector-specific funds, I’d already been investing in them (especially Fidelity Select funds) for a few years, and the market was down. I decided to direct new contributions to a specific mix of index funds and hold onto the previous investments at least until they recover some value.

  6. Wow, great news.

    I’ve been constantly urging to my employer to switch to Vanguard (company of only 10 or so, and I’m the only one that really seems to care, so my input counts….) for the exact reasons listed above — index fund choices are extremely limited in most plans (in mine, all I get is FXTMX/FSEMX), and the Freedom Funds are a rip off. Looks like this isn’t news to Fidelity.

  7. Independent George says

    It’s funny – my Fidelity 401k actually offers me the Vanguard target retirement funds, but not the Fidelity versions (not that I’m complaining; I’m very loyal to the Vanguard brand, and hold all of my IRAs with them, too).

  8. I think we would all be surprised how many people would invest in “Fidelity Undisciplined Equity”… I mean, it sounds like a hedge fund!

  9. You can use Morningstar Xray tool to see what the allocations come out to. Go to > tools > instant xray on the bottom. Enter the fund symbols then use the percentage value to use what Fidelity is saying.

    I looks to me like Fidelity is trying to add in all the funds so it looks like it is diversified beyond the typical total dom/intl/bond approach. (Oh, yea, it also looks like what individual portfolios look like when they chase the latest winners over 5-10 yrs 🙂

  10. Vanguard already offers a target date index option – its regular target date funds. They are 100 percent index funds.

    They have comparable, although slightly higher expense ratios.

    @Jordan: Vanguard target funds hold a small portion in their emerging market index – 4.1% in the Target 2040 (for example). I would also assume any broad-based bond index fund, like those in either the Fidelity or Vanguard Target options, would include exposure to high yield (junk) bonds. I have not verified this however.

  11. Having expense ratios for retirement accounts anywhere near 0.79% is almost criminal. With the rock-bottom expense ratios available, I think its crazy to pay more than 0.4% for index funds that are all basically the same. Then again, I’m picky.

    The difference between 0.2% and 0.79% over 30 years is the difference between making 16.5x and 14x your money. So, if you invested $100,000, that would be a $250,000 difference!

    Fidelity is not the only party at fault, but the employer either doesn’t know how to choose good options or, even worse, they are making money from a deal with Fidelity. If that is what your employer is offering you, clearly they are not looking out for your best interests.

  12. Thanks for sharing, Index funds seem to be quite a good investment option, though they don’t give you whooping returns, over a period of time they grow steadily to give you good returns.

  13. Morningstar recently reviewed Target Date funds from several fund families:

    Vanguard seems to be winning, due to low costs and good managers.

    “There were, however, a couple of Below Average ratings: Fidelity Advisor Freedom and Principal. Fidelity Advisor Freedom, one of two series that Fidelity currently offers, features 18 funds with an average star rating of 2.81.”

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