Are age-related funds a good idea (Fidelity Freedom, T Rowe Price retirement etc.)
Just curious what the consenus is on just dumping 100% of your 401k into one of the age related mutual funds.
My 401k is through Fidelity and they have "FreedomFunds" which retirement dates.
So I dump everything into the FreedomFund 2050 (since thats around the time I'll be retiring)
Is that a good idea?
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These funds are good for what they do. That is they work well over a long period of time, and should provide a good return at the time they reach their date. It's probably not right for you if you're not sure when you'll retire, or have other specific investing goals.
That said, they're great tool for "hands off" investors.
I am not fond of these funds because I feel they tend to over invest in bonds and bond funds. I prefer a more aggressive mix of investments.
For example: Retiring in 25 years allows me to be more aggressive than some. However, The Fidelity Freedom Fund 2035 invests nearly 20% in bonds, more than I would choose.
The main point though, is if these funds don't match your target asset allocation mix, they are not for you.
They can be a fine choice if you don't want to actively manage your overall portfolio. The thing to check on is the fees. You will want to minimize the fees for these funds. Also the way these funds work is to lower your percentage invested in stocks and raise the percentage invested in bonds and cash as you get closer to the date on the fund (2050 in this example). That is a fine goal but depending on your circumstances you might want to keep more of your money in stocks to beat inflation.
The problem I have with them is that they are a fund of funds, so you pay management fees twice. The age related fund charges a fee and invests in a changing pool of funds. These funds also charge fees. The fees themselves are small, but can make a big difference over time. Here is a random link I pulled out of Google that has a table that shows this effect.
With just a little bit of effort, you can duplicate these funds without paying the age related fund fees (you still pay the fees from the underlying funds). It also allows you to shop around for underlying funds with the smallest fees.
Check the expense ratio of the funds. Most founds (with the exception of Vanguard and a few Fidelity funds) have expense ratios that will over time eat away a lot of your income, and you won't even know it because it's hidden in the fund's prices or yield.
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