The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: MoonShadow on May 08, 2016, 06:41:18 AM
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What are the opinions of the membership regarding target date funds? Specifically, my 401k allows investing into the Fidelity Freedom class of target date funds, and the choices otherwise suck. Is it better to invest into a straight equity & bond index fund, or to choose a target fund?
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I have my 401k in a Vanguard Target Date fund with rock bottom expenses at 7 BP. I understand the 4 underlying funds it uses. I understand the schedule it follows to rebalance.
It's not clear to me how Fidelity chooses the underlying funds for their Freedom Series, and they have a high expense ratio at 75 BP and 3 times the turnover of Vanguard's product. That suggests, to me, some degree of active management. If you are a convinced indexer, you should seek more information before investing.
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Do you have access to Fidelity's Spartan funds? These are their low cost indexes and are better choices than Fidelity Freedom.
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Vanguard's target date funds are fine: you pay the investor class rates for Vanguard to rebalance for you. Alternatively, you could (once your balance is high enough) put your money in admiral class funds and rebalance on your own. Savings would be minimal but not zero.
Fidelity's situation is less clear. Are these Fidelity Freedom or Fidelity Freedom Index?
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If you do not have that knowledge then target date funds are greadt but just make sure to put all 100% in a target date fund and not just a portion because that defeats the purpose. If you have the knowledge and the expertise then you can do everything yourself and rebalance accordingly which would lead to some cost savings.
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Vanguard's target date funds are fine: you pay the investor class rates for Vanguard to rebalance for you. Alternatively, you could (once your balance is high enough) put your money in admiral class funds and rebalance on your own. Savings would be minimal but not zero.
Fidelity's situation is less clear. Are these Fidelity Freedom or Fidelity Freedom Index?
To follow up, see https://thefinancebuff.com/fidelity-freedom-index-funds.html and http://forum.mrmoneymustache.com/investor-alley/wealthmentbetterfront-nail-in-the-coffin-article/ for more discussion on the subject.
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Vanguard's target date funds are fine: you pay the investor class rates for Vanguard to rebalance for you. Alternatively, you could (once your balance is high enough) put your money in admiral class funds and rebalance on your own. Savings would be minimal but not zero.
Fidelity's situation is less clear. Are these Fidelity Freedom or Fidelity Freedom Index?
Honestly, I'm not sure. The documentation provided by the new company is vague.
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Nothing wrong with it as long as the expense ratios are reasonable. It's good for people who like the hands off approach or don't know much about individual funds. I have my wife's 401k in a Vanguard target date fund because, why not. The ER is .06 and it's one less thing for me to think about.