The New York Times and Investment News have documented the poor performance of Fidelity’s target date funds. Are you using Fidelity’s target date funds? Many are.
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Now that Pandora’s box is open, the ugly truth is there for all to see: Fiduciaries are not vetting their target date fund selection. The Big 3 – Fidelity, T. Rowe Price and Vanguard – own 75% of the TDF market. They are all bundled service providers with so-so TDF products, hired out of convenience and familiarity. This is a breach of fiduciary duty.
Fidelity is the first to show its weaknesses vis-à-vis the other two major providers, but there are plenty of other, even better TDFs, all scrambling for the crumbs.
The benefits of target date funds are diversification and risk control (professional management), preferably at a reasonable cost, all of which a participant is unlikely to achieve on his or her own. These benefits could be dramatically improved.
The industry is moving at glacial speed toward low-cost diversification (like Fidelity’s new product), but risk controls have not changed in response to the fiscal crisis of 2008 – the vulnerable remain in peril as they approach retirement.
For clear evidence that TDFs could be much better, see my new article, “Fiduciary Guide to Selecting Target Date Funds.”