Fidelity Investments edged out
The Vanguard Group Inc., a major rival in the retirement-planning business, for having the lowest-cost target date fund lineup as of the end of last year, according to research released Tuesday.
Fidelity Freedom Index charged 16 basis points for its target date series at the end of 2013, while Vanguard charged 17 basis points on its Target Retirement Series, according to
a report by research firm Morningstar Inc. One hundred basis points is equal to 1%.
But Morningstar also said the low fees associated with Fidelity's fund series did not necessarily translate to performance gains for investors.
“Despite having the lowest fees in the industry, Fidelity Freedom Index series has failed to distinguish itself since its late-2009 launch,” according to the report. “It's lower overall equity allocation played a role and so did a hefty allocation to a largely failing commodities market. In late 2013, Fidelity upped the equity allocation for its various suites of target date funds while also scaling back its allocations to commodities.”
Morningstar's data examined the average fee charged on each dollar invested in all the target date products offered in the fund category.
As Wall Street works to develop more highly customized investment products, target date funds are increasingly the pre-selected default option in defined-contribution retirement accounts, according to Morningstar.
Fidelity and Vanguard — along with Baltimore-based T. Rowe Price Group Inc. — manage nearly three-quarters of the assets held in target date funds. In 2013, Fidelity controlled the largest share of the market for the funds, nearly 30%, while Vanguard held about 27%.
The firms are close competitors: Vanguard recently overtook Fidelity to become the largest manager of U.S. defined-contribution assets overall,
Pensions & Investments reported last month.
In all, target date funds brought in $50.8 billion in new assets in 2013, and total assets held in the funds rose to more than $650 billion at the end of March, Morningstar said. Excluding market appreciation, that's a growth rate of about 10.5%.
While many view target date funds as a convenient way to save for retirement, the product first introduced in 1994 has also been criticized both for high costs and substandard asset-allocation decisions.
But Morningstar, which regularly highlights the cost of investment products as an important factor in fund-manager selection, said the fees on target date products have fallen for five straight years. In 2013, that meant investors paid on average 84 basis points to invest in the funds, seven fewer than in 2012.
Financial planners also frequently debate the wisdom of the pre-fabricated allocation decisions baked into the products — a “glide path” that adjusts exposure to stocks and bonds to lessen risk as investors get nearer to needing their money in retirement.
Nonetheless, the funds won favor in part due to passage of the 2006 Pension Protection Act, allowing plan sponsors to automatically funnel employee contributions to retirement accounts into target date funds.
Morningstar found evidence that an increasing shift to open-architecture fund series — which allow investments in funds offered by other companies — has produced no benefit for investors. Morningstar said open-architecture fund series, over five years, have a close-to-identical total return as closed-architecture series. The firm suggested that higher costs could be overwhelming the underlying performance benefits of open architecture.
That result comes even as the industry has moved toward open architecture — a shift documented by BrightScope Inc., another research firm, which found last year that the number of closed-architecture fund providers declined by 10 percentage points to 58% in 2012, the most recent year for which data was available.
