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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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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.

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    +1 for fees. I'm not too fond of Fidelity's fees in particular. Also, "depending on your circumstances, you may want to keep more money in stocks" ... depending on your risk tolerance, in particular. But you can pick a later target date if you want. – fennec Aug 14 '10 at 0:48
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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.

  • You still need to do your homework every couple of years to see what the fund owns, how it's expense ratio's compare to the other offerings in your 401k plan, and whether it's sufficiently diversified. No account is sufficiently diversified without holding Real estate, commodities/commodity producers and international assets in addition to the standard stocks, treasuries and bonds. – SpecKK Aug 30 '10 at 22:27
  • @SpecKK Not everyone is willing to do the same amount of work on their portfolio. For those people a dated fund might work well. On the other hand everything you mentioned is something you should be doing. – C. Ross Aug 31 '10 at 14:26
  • A forgotten target date fund is absolutely better than nothing. You still have to check at least the expense ratios every couple of years. Fund plans often change over time, merging and acquiring other funds or managers who want a bigger cut. Finally, if there is one lesson to be learned from this financial crisis, don't put all your eggs in one asset class or one fund, just in case they screw up. – SpecKK Aug 31 '10 at 20:57
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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.

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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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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.

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    You could always invest in the 2040 fund, if you'd just like a little more aggressive of an investment. – fennec Aug 14 '10 at 0:47
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    It's funny you say that target-date funds are too conservative. A lot of people who are close to retirement were stunned to realize how much of their target-date fund was invested in stock, and shocked when their retirement plans tanked. cnbc.com/id/38592391 – myron-semack Aug 14 '10 at 0:55
  • @msemack: Maybe when I am at the 10 or 15 years to go mark, I'll move my stuff more towards the conservative side, but with 25 years to go they seem too conservative. Scanning the article you mention, it even calls investing in target date funds within 10 years of retirement "the risk zone". – Alex B Aug 14 '10 at 3:30
  • @fennec: I like the way you think. That's an easy, out-of-the-box solution. – Alex B Aug 14 '10 at 3:30

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