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After 'a lot of flak' Fidelity Investments does a study and pledges to change how it manages its $170 billion of target date funds

The Boston giant announces findings to justify its surprising embrace of stocks but skeptics say Fidelity is under pressure to conform with rivals T. Rowe Price and Vanguard Group

Friday, September 27, 2013 – 4:56 AM by Brooke Southall
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Andrew Dierdorf: We're focused on shareholder outcomes.

Brooke’s Note: I spoke with a handful of non-Fidelity sources (and one brave one on the record) for this article and the more I heard, the more confused I became. You need the spatial mental capabilities of Euclid to follow all the arguments about the right way, morally, legally and technically, to set and forget target date allocations and their glide paths. What is clear is that Fidelity just made a pretty big relative shift and like most companies, its move seems to be all about ideas and all about business, and good luck separating the two. What does this all have to do with advisors? Many advisors are big users of target date funds for one thing and anything that seems too simple and good to be true — probably is. Second of all, through its target date funds, Fidelity has installed itself as, in a sense, a grand advisor to 6.5 million investors. So a CIO at an RIA can see this as a window into what big-time competitor is doing, better defining its niche.

Nearly eight months after a blistering article in The New York Times, Fidelity Investments has promised to make some big changes in the way that it manages target date funds.

The Boston-based giant will invest the assets of the 6.5 million investors who own its target date funds much more aggressively in stocks while laying off of bonds. Its mix will look, on average, more like 60% stocks and 40% bonds rather than a more tentative fifty-fifty split. See: Viewing RIAs in a new light, Fidelity Institutional shifts from a top-down to a bottom-up emphasis to serve them.

Fidelity explains the surprising shift in its long-held conservative allocation by saying it reflects deep research into the reams of data at its fingertips — not only as the biggest player in target date funds with $175 billion of assets but also as the 401(k) king. This includes findings that investors have more of a stomach for risk than realized based on 2008 behaviors and that investors start investing sooner and live longer than previously thought. See: Fidelity brings its 401(k) muscle to RIAs with new product.

Bull market takes its toll

Still, industry experts are quick to point out that Fidelity is the one certain beneficiary of the change and that its timing need be noted. Fidelity tends to earn more fees when it invests in equities, where fees are highest. Fidelity uses its own mutual funds for the bulk of its investment management of target date funds.

Even more important, critics say, the long bull market in equities is starting to take its toll on Fidelity’s relatively equity-averse target date fund managers.

Ron Surz: They lost to T. Rowe and Vanguard in 2012 and they took a lot of flak for that.
Ron Surz: They lost to T. Rowe and Vanguard in 2012 and they took a lot of flak
for that.

“They lost (in target date fund performance) to T. Rowe and Vanguard in 2012 and they took a lot of flak for that,” says Ron Surz, president of Target Date Solutions in San Clemente, Calif. See: Big chill: Worried RIAs and other 401(k) leaders gather in Chicago in hopes of saving the goose. Surz is sub-advisor for SMART Funds offered by Hand Benefit & Trust, Houston. SMART are collective trust target date funds.

Big three oligopoly

Surz points to a Feb. 3 New York Times article, Target Date Funds at Fidelity Fall Short of Rivals to illustrate the heat Fidelity has been feeling on this delicate topic.

The article, leaning heavily on Morningstar Inc. data, identifies The Vanguard Group Inc., T. Rowe Price Group Inc. and Fidelity as essentially an oligopoly that controls the $500 billion-plus target date market — but Vanguard and T. Rowe handily outperformed Fidelity in 2012, largely on the strength of more aggressive tilts toward ever-surging stocks.

The article went on to say that Fidelity’s underperformance was exacerbated by its higher fees, a result of reliance on its own actively managed funds. See: The 401(k) industry braces itself for fruits of a CalPERS rethink that reflects a cut-the-crap mentality about active investing.

Still, it is notable that as of Aug. 22, T. Rowe Price launched new funds that recognize that some investors are more risk averse as a complement its core T. Rowe Price Retirement Funds, which had $88.1 billion in assets as of March 31.

T. Rowe will allocate 42.5% of the new funds’ assets in equities at the named retirement date, compared to 55% for the existing Retirement Funds series.

Not pretty

The Times article pointed out that a nadir of sorts was reached in the fourth quarter of 2012 when 13 of 14 Fidelity target date funds performed worse than 75% of its competitors’.

The ugly result for Fidelity was less inflows to its target date funds than either T. Rowe and Vanguard.

As of Aug. 31, the total assets under management for Fidelity Freedom Funds stood at $174 billion, including $18.8 billion in Fidelity Advisor Freedom Funds, from $152 billion in assets under management for Fidelity Freedom Funds, including $16 billion in Fidelity Advisor Freedom Funds as of the same date the year before.

After original publication of the article, I was able to interview Andrew Dierdorf, co-portfolio manager of Fidelity Freedom Funds. He reiterated some of the points made by his company’s spokeswoman below. His response to expressed concerns in this article about how much competition from other players plays on Fidelity’s pivot on stock allocation was to say that all decisions put “shareholders” first. shareholders in this instance are investors in the target date funds. “We’re focused on shareholder outcomes.”

He says that the low rates on fixed income bode badly for the returns investors need over the long haul to achieve their personal retirement goals and that stocks look “fairly valued” which is to say that they should perform according to historical norms. The stock market tends to perform in the 5 percent to 7 percent range over long periods and he says that Fidelity believes that — over a 20 year period — the market can reasonably be expected to hold true to that norm.

Stomach for the storm

Nicole Goodnow, Fidelity spokeswoman says that her company has a history of doing comprehensive reviews based on its data on a periodic basis, and this latest adjustment in allocation was a result of that.

For one thing, she says, the study found that small investors have more stomach for risk — as proven by a giant sample of Fidelity data from 2008-09 — than it had built into its thinking before. “They stayed in and they didn’t reallocate funds,” she says. “Investors are reacting as they should.” See: Of Trumpets and Tulips: Is time diversification a myth or reality? Does time horizon affect the tolerance for risk?.

Knowing that investors can ride out the worst storms means that Fidelity doesn’t fear (as much) that a heavier stock allocation in bad markets will induce investors to run for the lifeboats at just the wrong time.

Another factor is the stock market in the here and now: In other words, Fidelity is investing more in stocks because it believes stocks are priced attractively. The company has even expressed on its website that the S&P 500 could be poised for a massive bull run”:https://www.fidelity.com/viewpoints/active-trader/a-bullish-chart?ccsource=email_monthly.

Round and round it goes

Where Fidelity is headed with its TD allocations for the Fidelity Freedom 2020 fund.
Where Fidelity is headed with its TD allocations for the Fidelity Freedom 2020 fund.

The third factor is a better understanding of when investors start and conclude their investing. Fidelity is pegging the start at about 25 years old, which is younger than previously presumed.

“In general, Fidelity believes that starting points matter, and that the company’s secular capital markets outlook informs its asset allocation positioning within the glide path,” the company states in a release.

Goodnow adds that Fidelity is also getting a better sense of just how much longer people are living — way past 80. This makes time horizons longer, which means that greater exposure to equities make more sense.

For example, up until now, Fidelity tended to have a 48-year-old 73% invested in stocks. Now it’s going to be 90%. Another example: Somebody who is 85 years old would have only been invested 20% in equities. Now it’ll be closer to 24%. The changes will be made by Fidelity between now and the end of the year. See: A refresher on how an advisor should approach the needs of clients as they near retirement.

Ironically, the smoothing of the glide path comes at a time when glide paths have been criticized for not being conservative enough. See: Why target date funds fail in the one area they’re supposed to succeed — downside protection.

Most crucial five years

Indeed, Surz says this lurch toward stocks will almost certainly help Fidelity but that it is questionable as far as stewardship of retiree money goes.

Fidelity, he says, will almost certainly realize better returns and gain better accolades from Morningstar by upping its stock allocation because, indeed, stocks to tend to outperform bonds in the long run and these funds are, after all, retirement assets.

The reason that this more aggressive approach — by T. Rowe, Fidelity, Vanguard and others — isn’t prudent is because the fate of retirees is tied so closely to how their fund performs in the five years leading up to retirement. If that period coincides with a downturn in the market then the investor ends up in rough shape, making all the long-term charts in the world useless, according to Surz.

“The No. 1 objective is: don’t lose my money — especially when I’m 70 years old. By investing aggressively, you are swinging for the fences and maybe you’ll get it right, but there are no do-overs.” See: An X-ray of one affluent, educated and sophisticated investor’s portfolio shows how it was chewed up by fees.

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Mentioned in this article:

Morningstar, Inc.
Top Executive: Joe Mansueto

Robert Boslego

Robert Boslego

September 27, 2013 — 8:08 PM


The cumulative daily returns of the big 3 target date fund families can be nearly replicated by allocations using just 2 ETFs (one stock, one bond) and do not protect assets when prices drop.

The ETF strategies require no thought, if you know what I mean.


Elmer Rich III

Elmer Rich III

September 28, 2013 — 12:37 PM

OK. Phil wants to make it personal rather than professional. Let’s unpack his personal side.

As the promoted “Center for Due Diligence” let’s do some due diligence and ask how much Phil personally, or any entity he benefits from, has received from Fidelity over the last, say, 10 years?

Let’s also ask if there is a “Pay to play” set of business practices for the conferences.

Fair questions?

Philip Chiricotti

Philip Chiricotti

September 28, 2013 — 3:50 AM

You will need at least two dogs.

Brooke Southall

Brooke Southall

September 27, 2013 — 6:34 PM


This is excellent back story to the back story.

much appreciated,


Robert Boslego

Robert Boslego

September 27, 2013 — 4:16 PM

According to another report, Fidelity’s Bruce Herring, group chief investment officer of the global asset allocation division, also said their outlook for bonds played a role. I totally agree with that. I think bonds are riskier than stocks for the next 5-10 years and could pose big trouble for retirement portfolios that are heavily invested in bonds.

Stephen Winks

Stephen Winks

September 27, 2013 — 7:39 PM

Thematically, client outcomes have become far more important than singular investment performance especially with retirement assets for those in retirement with out the time to recover from under performance. Ron Surz’s caution that retiree risk may not be fully appreciated should be heeded. In today’s perilous investment environment where the Quantitative Easing music must eventually stop do we have the discipline in place to mitigate significant market correction?

I hope every Target Date Fund has a mechanism to protect assets should a significant down turn occur, even if it is not fashionable to suggest anything but blue sky.


Elmer Rich III

Elmer Rich III

September 27, 2013 — 11:25 PM

Of course, it’s always best to have independent academic and experimental studies and make the data public for others to analyze – but our industry only really does “research” for sales uses. Ho hum

Independent research says fees are the biggest contributor and Morning start styles, for example are useless.

There will be no progress in finance and investment practices until the “black boxes” are retired and free data is available. There is no way to know if anything Fido says is factual or evidence-based. All we know is what the PR dept. puts out.

“As noted by observers, multiple factors are no doubt in play, including forward looking capital market forecasts that indicate shifting risk/return characteristics between equities and fixed income. “ Where is there any evidence for this statement?

Philip Chiricotti

Philip Chiricotti

September 28, 2013 — 12:24 AM

Elmer: You should buy a dog and get some love in your life. The evidence is obvious to those that know what they are talking about, i.e., consultants truly knowledgeable about Fidelity. You are an outsider not capable of looking inside at the essence. A waste of time to interface with you.

Robert Boslego

Robert Boslego

October 7, 2013 — 4:04 AM


This survey is not about life insurance. It’s about retirement portfolios. “Those with $200,000 in Investable Assets Say Volatility Drives a Desire for Balanced Approach.”

“The vast majority of Americans ages 25+ with more than $200,000 in investable assets surveyed in the Allianz Life 2013 Investor Market Perceptions Study said they are seeking some form of protection from losses as they accumulate assets for retirement. In total, 95% of these respondents said they would like a financial product with no potential loss or at least some level of protection from loss rather than one with unlimited potential growth but also unlimited potential loss.”

Buy-and-hold strategies, regardless of loss potential, is no longer acceptable for many individual investors, perhaps the vast majority, as Allianz has found. If Fidelity says investors can stomach big risk because many didn’t pull out, they are not assessing the stomach-wrenching that was present for many investors, especially those approaching retirement.


Robert Boslego

Robert Boslego

October 7, 2013 — 3:22 AM

According to a new Allianz Life survey, 84 percent agreed that investors should always have protection from loss, even if it reduces potential gains. This flies in the face of the Fidelity study that small investors have more stomach for risk.

Brooke Southall

Brooke Southall

October 7, 2013 — 3:42 AM


A big life insurance company says investors should always protect themselves from loss….with life insurance par chance?


R. McAloon

R. McAloon

November 4, 2013 — 10:38 PM

The underperformance by the Freedom Funds are not due to fees. Fidelity underperformed by a couple of percentage points which is massive considering the correlation among rival funds is VERY high. If you delve a little bit more into the core holdings of the Freedom Funds, you will notice that Fidelity took a sizable bet on inflation-protected securities and commodities over the years. The percentage of total assets for these two classes stretched as high as 14% for some of the funds. Absolutely pathetic.

Fidelity is announcing changes to the set-up and allocations within the Freedom Funds within the next couple weeks and unfortunately for them this is going to open pandora’s box. The last thing anyone wants to see with a money manager is a significant shift in style especially if it spurs from a bad bet. I expect a significant increase in equity allocation with a sharp decrease in commodities and a minor decrease in fixed income. It appears as though Fidelity purposely set up allocations the way they did, and now that the underperformance has caused a shift in investment style for the funds, they will for sure have their tails tucked between their legs until they can outperform or atleast track their benchmark.

Another point worth noting is the lack of experience and slight conflict of interest with these funds. The author mentioned it but there is a bias because they use their own actively managed funds. I see an average of 21 distinct managers working on behalf of Freedom Funds (above average than most target dates) with an average experience of 4 years (significantly below average than most target dates). At this point companies would be better off setting up a custom QDIA using only 2 or 3 funds to track a specific benchmark.

Elmer Rich III

Elmer Rich III

September 28, 2013 — 2:48 AM

Ah, the classic personal attack to dodge a question. So instead of answering legitimate questions – Phil C personally attack the questionnaire. It’s a tactic called “Atatck the messenger.” A very tired and unprofessional tactic – but it works.

Like the dog mention, sleazy but a crowd pleaser.

I have worked with Fidelity since 1991 when they proclaimed that 'This 401k thing is gonna go nowhere.”

Look, Fido is one of the Big Dogs so everyone wants to make nice and get sponsorship money. i have no interest in any check from them. Phil, has conferences to fund, and profit personally from, so he will lead the charge on flattery. Understandable.

Fido also will show it’s “teeth.” We criticized or questioned them years ago and they stalked us online and sent us a Cease and Desist letter. Little ole us! Fair enough, they have always been heavy handed.

Here they are effectively saying:

- There is a problem with TD funds

- We have studied it internally

- We have solved the problem

OK, since this was all internal it is currently only a sales claim. There is no way to know if any of their statements are true. That is typical for sales organizations but not professional ones.

The financial services industry, because of the web, can no longer promote platitudes and business claims with no evidence. The web reveals all. Just a fact of life now.

Philip Chiricotti

Philip Chiricotti

September 27, 2013 — 6:10 PM

Fees are important, but I don’t think they are responsible for the underperformance of Fidelity’s target-date funds.

Net of revenue sharing, their “K” series is quite competitive. Indeed, T. Rowe Price has been on a roll with comparable fees. Also worth noting that the low cost TDFs offered by Vanguard have not topped the charts. They have delivered consistently above average returns, but no chart topping. On a risk/reward basis, TIAA-CREF and American Funds have both bested Vanguard.

As noted by observers, multiple factors are no doubt in play, including forward looking capital market forecasts that indicate shifting risk/return characteristics between equities and fixed income.

Fidelity’s clients have also no doubt noted that their equity allocation was more conservative than the majority of their peers, particularly T. Rowe and Vanguard. Fidelity’s custom benchmark aside, they may have concluded that they needed to change their equity allocation to remain competitive.

Some of their recent asset allocation shifts, particularly in the commodities area, were poorly timed and detracted from their core competency. By increasing their allocation to equities, they are focusing on their key investment strength, the management of active stock funds.

Recoveries are always uneven, but forecasters have consistently under estimated the growth in the U.S. economy. Indeed, the lack of national leadership aside, it is hard not to be bullish on the U.S. economy. The energy transformation is also a huge and generally unrecognized bullish factor. Increasing equity allocations after an extensive bull market run is, however, no walk in the park.

Philip Chiricotti
Center for Due Diligence

Stephen Winks

Stephen Winks

September 28, 2013 — 2:45 PM

Thanks Robert,

I appreciate that TDF vendors leave it to the consumer when the you know what hits the fan.

Thus my hopeful query “let’s hope TDF vendors have a mechanism to protect capital when things go wrong” which is an increasingly likely scenario as QE is tapered.

Robert, our industry is set up only for only good news and the music is about to stop. TDFs as you cite are selling a false choice for security. It is clear to you, because you have spent decades managing commodity (oil, etc.) pricing risk for our largest corporations.

I hate the fact that unprotected retired investors are headed for a highly likely disaster.


Elmer Rich III

Elmer Rich III

October 7, 2013 — 4:23 PM

Behavior is all biology and physiology, of course. Thinking, consciousness and “decision making” and subjective experiences have been proven to be largely cultural constructs with weak predictive value on financial behavior.

As the population ages basic biological and physiological factors dominate. For example:

“The wisdom of aging may not apply to economic decisions. In a study of choices make about money, the oldest people performed the worst—even beating out the usual bad-decision champions, adolescents.

“Most important real life decisions are taken under conditions of uncertainty,” she says. When we invest in the stock market or choose a health insurance plan, we have to weigh unknown risks and payoffs. And we may have a harder time making those decisions as we age”

Finally, “risk” is just a sales term for loss. All animals are hyper-avoidant of any suggestion of loss or threat. Humans are overly and harmfully reactive to imagined losses and threats. But that’s how our brains evolved. There is, effectively, no way to teach, talk people out of this behavior.

As we age these weaknesses in brain function accelerate – more so in men. These are medical facts.

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