A target date fund (TDF) is a sensible and increasingly common choice for retirement saving. My own employer, Union College, relies on Fidelity or TIAA TDFs as the default investment option. I was therefore curious to investigate recent reports that Fidelity is loading its TDFs with extra risk by chasing returns, and that some prominent defined contribution plans are taking Fidelity TDFs off their menus (e.g. Dartmouth and U of Central Florida). It is well known that TDFs vary substantially in their risk profiles – even those with the same target date. However, changing allocations in order to chase returns is probably not what most TDF investors thought they were signing up for.
I scraped a few years of data on asset allocations in Fidelity TDFs. This includes their Freedom, Advisor and Index families. (There are also the now deprecated “K”, and the new “Flex” families, but I will ignore those for now.) I am particularly interested in what is happening to the Index family versus the Freedom and Advisor families. The visualization below tells the story. It is indeed the case that Fidelity TDFs have a lot more foreign stocks in 2017 than they had in 2012, and this is particularly true for the Freedom and Advisor families. It is also apparent that while the Index family experienced a one-time shift in the allocation to foreign stocks, the Freedom and Advisor families have been increasing the allocation in most years.
I am pleased that the Index family, except for the one-time shift in 2014, keeps its glide paths relatively constant. A gradual decrease in the riskiness of asset allocation over time is what TDFs are supposed to. It is not clear what the baseline allocation should be (i.e. which glide path is optimal). Therefore, it seems reasonable to occasionally evaluate whether the allocations reflect the investment universe. I would like to think that Fidelity realized in 2014 that the U.S. share in the world markets is declining, and that a higher allocation to foreign stocks is appropriate. The higher foreign/domestic equity split of about 30/60 is much closer to the foreign/domestic split of 50/50 in the MSCI All Country World Index. In short, I don’t see evidence of return chasing in the Index family of Fidelity TDFs. Moreover, the Index TDFs are comprised of the same five index funds today as they were at their inception in 2009. Each fund corresponds to one asset class class making up the Index TDFs. Thus, there is no scope for return chasing within each asset class.
The Freedom and Advisor TDFs are actively managed. Therefore, as long as the asset allocation is within the investment objectives set out in the prospectus, the managers can do whatever they want. They can increase the allocation to foreign stocks because they want to match the risk profile of the world market, or because they think that foreign stocks will outperform other assets. I believe the problem with Fidelity Freedom and Advisor TDFs is not that they ratcheted up foreign stock allocations, but rather that they are actively managed. If investors trust their manager, then they should go in for the ride. If they don’t, they should switch to the Index family.
In my opinion, Fidelity Index TDFs remain a terrific choice for investors. Their expense ratios of around 10 basis points match those of Vanguard. Although, I don’t know if Fidelity’s glide path is better than Vanguard’s, or anyone else’s, I don’t think it matters. What does matter is that a TDF provides a low cost exposure to major asset classes while dialing down the riskiness of that exposure over time in a stable and predicable manner. In the foreseeable future, I expect that the Fidelity Index TDFs will do just that.