vanguard target retirement fund vs. fidelity freedom fund


M

Mike

I'm 38 and have about $50k or so spread across three retirement
accounts: a Vanguard Target Retirement 2045 fund, a Fidelity Freedom
Fund 2040, and some misc holdings in Morgan Stanley. I'd like to merge
them all into either the Vanguard or the Fidelity fund, but I'm not
sure which one to choose.

The Vanguard fund has a lower expense ratio, and I like the tools on
its website, but it also has a $25 annual fee. The Fidelity fund has
no fees, and it also has a slightly higher percentage of foreign
investments. Other than that, I'm not really sure how to choose one
over the other.

On the other hand, maybe it's not necessary to merge them all? Or is
there a better option?

Ideally, I'd like to set up my own portfolio -- preferably one with a
lot of risk, because I'm way behind in my retirement savings. I'm just
really having trouble finding the time to research and monitor
everything, despite my interest in learning and participating actively
in investing; hence, I figured one of the targeted retirement funds
would be a good choice.

Thanks for any help.

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D

Default User

Mike said:
The Vanguard fund has a lower expense ratio, and I like the tools on
its website, but it also has a $25 annual fee.
Are you sure? Vanguard charges a $20 fee for any fund with less than
$10,000 in it, but that's nothing specific to TR 2045. Do you have less
than that amount in aggregate? Also, Vanguard waives that fee if you
elect for electronic statements.




Brian

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M

Mike

Are you sure? Vanguard charges a $20 fee for any fund with less than
$10,000 in it, but that's nothing specific to TR 2045.
I just checked again, and turns out I misread things. Vanguard does
charge a $25 fee for simple IRAs, which is waived only if you have
less than $100k in the fund. The $20 fee is for nonretirement accounts
and, I just saw, traditional and Roth IRAs, and is waived after
putting in $10k. So no fee for me, after all.

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M

Mike

Risk doesn't necessarily mean high return.
A retirement fund will have higher amounts of bonds than would be
optimal for capital appreciation.
True. My Vanguard and Fidelity target funds are both IRAs, though, and
right now they have about 80-90% stocks or more.

I was thinking about sector investing. I might look into that, too.

Thanks,
Mike

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R

Ron Peterson

True. My Vanguard and Fidelity target funds are both IRAs, though, and
right now they have about 80-90% stocks or more.
Do you have those funds in a brokerage account? If so, you would be
able to buy ETFs and individual accounts.
I was thinking about sector investing. I might look into that, too.
I think that you need to have at least 20% in the energy sector with
current price increases.

--
Ron

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B

BreadWithSpam

Default User said:
Are you sure? Vanguard charges a $20 fee for any fund with less than
$10,000 in it, but that's nothing specific to TR 2045. Do you have less
than that amount in aggregate? Also, Vanguard waives that fee if you
elect for electronic statements.
There's a $25/fund fee if it's in a SIMPLE IRA, but it
doesn't sound like the OP is in one of those. No such
fee on nonretirement, IRA, Roth IRA, SEP-IRA of ESAs.

And, as you said, that fee's waived if you get electronic
delivery. The OP said he had about $50k across his
accounts - if that all went into the target 2045 fund,
he'd have no fees and still get all the paper statements.

The Fidelity Freedom fund-of-funds spreads their
assets across 23 different Fidelity funds (some of
which are quite good) - but that's a lot of
underlying funds, and most of them are actively
managed and just a bit too messy for my taste.

The Vanguard Target Retirement fund-of-funds spreads
their assets across 5 very efficient index funds. The
asset allocation is much easier to understand, the
fees are very much lower, the tax implications (important
if this is not a tax-favored account) are substantial -
there should be a lot less tax drag on the Vanguard
fund-of-funds.

Morningstar loves the Vanguard and the T. Rowe Price
target retirement funds.

If you had to put your retirement money, especially
money for long long future retirement (ie. our 38? yr
old OP), these are all decent options. Most folks
who muck about managing and trading and/or even just
selecting multiple funds on their own are probably
going to do far worse than someone who simply goes
into one of these and lets the fund do its job.

To the OP - you said these are all "retirement" funds -
is this all regular or Roth IRA accounts?

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E

Elle

Mike said:
The Vanguard fund has a lower expense ratio, snip
I'm just
really having trouble finding the time to research and
monitor
everything, despite my interest in learning and
participating actively
in investing; hence, I figured one of the targeted
retirement funds
would be a good choice.
A rational decision.

I would argue VTIVX's expense ratio is a lot lower; 0.19%
vs. the FFFFX's 0.78%. Compounding this difference adds up
to around 15% difference in final portfolio value over 35
years. From what you say, I would switch all to the Vanguard
fund. But if you don't, I do not expect it to make much
difference. Studies (and common sense) indicate that what's
most important to fuss over (once you have a reasonable
allocation) is saving for retirement regularly and
abundantly.

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M

Mike

The Vanguard Target Retirement fund-of-funds spreads
their assets across 5 very efficient index funds.  The
asset allocation is much easier to understand, the
fees are very much lower, the tax implications (important
if this is not a tax-favored account) are substantial -
there should be a lot less tax drag on the Vanguard
fund-of-funds.
Cool, that helps, so based on that and what others have said, I'll
probably put the money into the Vanguard fund. I might check out T.
Rowe first, though.

Oh, and my Vanguard fund is a Roth IRA. The other two are old 401ks.

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R

Ron Peterson

Oh, and my Vanguard fund is a Roth IRA. The other two are old 401ks.
You might want to consider converting the 401ks to a standard IRA. The
standard IRA can then be converted to a Roth if your income is low
enough or you can wait until 2010.

--
Ron

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B

BreadWithSpam

Cool, that helps, so based on that and what others have said, I'll
probably put the money into the Vanguard fund. I might check out T.
Rowe first, though.
You mentioned elsewhere, I think, an interest in getting
a bit more exposure to one sector or another beyond what
these funds do. That's actually still something quite
reasonable to do (if you really believe in the sector
or asset in question) - by starting with a "core" investment,
perhaps most or almost all of the money - in one of these
funds and then enhancing it with a small slice of a fund
which gets you the asset you were looking for.
Oh, and my Vanguard fund is a Roth IRA. The other two are old 401ks.
That may complicate things a little bit, but not much.
I'm sure the nice folks at Vanguard will be very happy
to help, but the basic situation is that you cannot mix
Roth IRA money and old 401k money directly. The 401k
money may be rolled over into a _regular_ IRA rather
trivially and with not tax consequences. If you did that,
then you'd have two accounts at Vanguard, both in the
same name, etc, except that one would be Roth and the
other traditional IRA. The other step you can take is
you may be able to convert the 401k money over to the
Roth. If you do so, you'll have to come up with enough
money to pay income taxes on the amount you convert
and you'll want to watch your marginal tax rates (ie. you
probably don't want to do that if it pushes you into a
higher bracket). Or, if your income is too high, you
may not be allowed to do the Roth conversion at all.

Regardless, as I said, most folks would do quite well
to just use one of these funds, at least to start with
until they accumulate substantial assets and/or really
find time and a need to tweak things. Bear in mind
that these very very long-dated target funds are going
to be rather volatile - they are almost all stocks and
will have a lot more volatility than a more conservative
balanced portfolio. I've posted before about how big
a difference having a good sized slice in fixed income
can make - you can reduce overall portfolio volatility
a lot (and the impact of down years like '02 or, um, now)
a lot - without making as big a dent in your long term
results as one may think.

Over a 13 year period, for example, I found that a
portfolio of 50% bond market index and 50% total
stock market index had a blended long-term return
averaging over 9.3% where the 100% stock fund had
a return of 11.13% over that same period of time.

That's a big difference, sure, but surprisingly
small, when one notes that the volatility was cut
approximatly in half. '02 for the all-stock portfolio
lost almost 21% and over '00, '01 and '02, there
was a total loss across those three years of 37%.

During '02, the 50/50 portfolio lost 6.35% and
across '00, '01 and '02, the 50/50 portfolio lost
a total of only 7.2%.

This isn't meant to scare you, but to make sure
that if you go into an all-stock or an almost-all-stock
portfolio, that you are prepared for the possibility
that there will be stretches of time where your losses
can be quite painful.

Most of these "target retirement" funds weren't around
in '00, '01 and '02, so you won't see some of these
scary numbers in their literature. Who knows what we'll
see when we finish with the current unpleasantness - but
it should be rather eye-opening!


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D

Default User

There's a $25/fund fee if it's in a SIMPLE IRA, but it
doesn't sound like the OP is in one of those. No such
fee on nonretirement, IRA, Roth IRA, SEP-IRA of ESAs.
Right, he mentioned that he'd misread that part.
And, as you said, that fee's waived if you get electronic
delivery. The OP said he had about $50k across his
accounts - if that all went into the target 2045 fund,
he'd have no fees and still get all the paper statements.
With that amount, I'd suggest Wells Fargo. He'd qualify for a no-fee
linked PMA account, and get 100 free transactions per account. So any
Vanguard fund (I think) and of course all the ETFs you could want.




Brian

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M

Mike

Or, if your income is too high, you
may not be allowed to do the Roth conversion at all.
Well, that's a bit complicated. My income is pretty good (compared to
what it has been), but I'm actually living in Norway right now and
getting paid in kroners. If I understand the income tax system
correctly, even though I'm not earning any dollars, I'll have to pay
U.S. taxes (boo) on whatever portion of my income is above a certain
cutoff. I think that's currently $85k, so if I'm making the equivalent
of $100k, I think I'd have to pay taxes on $15k. I think. If so,
though, I'm not sure whether my tax bracket would be determined based
on the $15k or on the $100k...

This isn't meant to scare you, but to make sure
that if you go into an all-stock or an almost-all-stock
portfolio, that you are prepared for the possibility
that there will be stretches of time where your losses
can be quite painful.
If I threw in more fixed assets, would that require me to devise my
own portfolio, or is there a target management kind of fund that might
do that? I'm not necessarily opposed to designing my own, but it would
require time that I just haven't been able to find so far...

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M

Mark Freeland

Default User said:
With that amount, I'd suggest Wells Fargo. He'd qualify for a no-fee
linked PMA account, and get 100 free transactions per account. So any
Vanguard fund (I think) and of course all the ETFs you could want.
Some limitations on what Wells Fargo offers in terms of Vanguard funds:

- no access to Vanguard's MMFs; this is particularly significant with
WellsFargo, as they force you into low paying cash accounts
- no access to Vanguard's managed payout funds (which could be good for
tax-sheltered accounts, as Vanguard points out); I don't know what other
funds might be missing
- requires $100K to invest in cheaper Admiral shares (at Vanguard, if
you've owned the fund for 10 years, and have $50K invested, you can convert
to Admiral shares)
- may not be able to convert from Investor to Admiral shares (at $100K)
without tax consequences (in taxable account).

The last point is that, if handled properly, exchanging Investor shares for
Admiral shares can be a non-taxable event. Many brokerages (I don't know
about WF in particular) are not set up to handle this conversion, and will
instead sell the Investor shares and purchase Admiral shares, recognizing a
gain. Doesn't matter in a tax-sheltered account, but still a limitation of
some outside brokerages.

Right now, Vanguard doesn't offer Admiral shares of its target maturity
funds.

On the plus side, accounts held through intermediaries (like WF) are not
subject to the $20 fee for balances below $10K; so the OP could split the
investment six ways without additional fees. Also, the OP would (as you
said) have access to an even cheaper share class of many of Vanguard's
funds - their ETF (formerly VIPER) share class.

Mark Freeland
(e-mail address removed)






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D

Default User

Mark said:
news:6davliF1n3ehU1@mid.individual.net...
Some limitations on what Wells Fargo offers in terms of Vanguard
funds:

- no access to Vanguard's MMFs; this is particularly significant with
WellsFargo, as they force you into low paying cash accounts
That might be the case, but they certainly offer plenty of MM funds.
I've used FSLXX in the past.
- no
access to Vanguard's managed payout funds (which could be good for
tax-sheltered accounts, as Vanguard points out);
Certainly a consideration, especially if one were moving out of
accumulation phase.

[other excellent points snipped]




Brian

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B

BreadWithSpam

Well, that's a bit complicated. My income is pretty good (compared
to what it has been), but I'm actually living in Norway right now
and getting paid in kroners. If I understand the income tax system
correctly, even though I'm not earning any dollars, I'll have to pay
U.S. taxes (boo) on whatever portion of my income is above a certain
cutoff. I think that's currently $85k, so if I'm making the
equivalent of $100k, I think I'd have to pay taxes on $15k. I
think. If so, though, I'm not sure whether my tax bracket would be
determined based on the $15k or on the $100k...
The determining factor is your "modified AGI for Roth IRA
purposes" being under $100,000. See IRS pub 590 for the
details, but basically, it's your AGI, with income from
any Roth conversions excluded, but a few other things
added back in. If you are taking the Foreign Earned Income
Exclusion (up to $87,600 in '08), that comes out before
you calculate your AGI (ie. it's an exclusion, not a
deduction), so that may help you qualify to convert.
I would definitely talk to an accountant, though.
If I threw in more fixed assets, would that require me to devise my
own portfolio, or is there a target management kind of fund that
might do that? I'm not necessarily opposed to designing my own, but
it would require time that I just haven't been able to find so
far...
Basically, the shorter "maturity" target date funds
have higher levels of fixed income. Example - the
Vanguard Target funds:
2010: 48% stocks, 44% bonds
2020: 62% stocks, 28% bonds
2030: 75% stocks, 14% bonds
2040: 79% stocks, 10% bonds
(they all have 10-20% in cash and/or other categories)

You're (iirc) 38 years old. You've got at least, what,
a 20 year time horizon? If you can stomach the volatility
(and that's a big *if*. You have to have a stomach of
steel sometimes!), your long time horizon raises the
chances that you can safely ride out the higher volatility
of a more-stock portfolio and thereby harvest the higher
returns that go with it. Only you can decide what's really
your comfort zone. In most cases, with such a long time
horizon, I'd expect most folks to go with at least 60%
stocks. The problem with the 2020 target fund is that
you'll need to keep watching it - over time it gets more
conservative, even if you don't really need it to. As I
said, these are a great starting point - and in any case,
you can certainly build a core holding with one of the
and then buy another fund which balances it back to where
you really mean to be later. Or if it's in a retirement
account, you have no tax consequences from shifting to
a different one later if the balance isn't where you
want it to be.

There are also "balanced" funds which are similar to
the target retirement funds in terms of allocating
investments to several asset classes, but they
generally stay in relatively fixed asset class
distributions rather than becoming more conservative
over time like the target funds. Look, for example,
at Vanguard's "LifeStrategy" funds. LS Moderate
Growth is 70% stock, 30% bonds, built out of three
of their index funds and a slice of their "asset
allocation fund" which allows it to shift allocations
around a bit, but not all over the place. In the
00-02 stretch, VSMGX lost a total of 15%, yet over
13 years - including that stretch, it averaged about
10%. (down a touch more than 8% YTD. Blech.)

Anyway, the point is that these balanced and/or target
funds can be great. Just make sure that you agree
with their asset allocations and risk. The date in
the title isn't nearly as meaningful as what's going
on under the hood. Assess your personal risk tolerance
as honestly as you can and then find a fund which
matches that. You'll sleep a lot better doing that,
I think, than you will just accepting a year in the
title.






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M

Mark Freeland

Default User said:
That might be the case, but they certainly offer plenty of MM funds.
I've used FSLXX in the past.
How did you do that? It would make WF more attractive. They don't list
this fund (or any other Fidelity *XX MMF) on their list of available
Fidelity funds:

http://cxa.marketwatch.com/WellsFargo/MutualFundCenterPublic/FamilyListResults.aspx?FirstLetter=F&family=Fidelity&mode=

Mark Freeland
(e-mail address removed)

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D

Default User

Mark said:
news:6dcf52F1rrshU1@mid.individual.net...
[Wells Fargo]
How did you do that? It would make WF more attractive. They don't
list this fund (or any other Fidelity *XX MMF) on their list of
available Fidelity funds:
I think they list all MM funds separately. That being said, I can't get
the MM screener to list any funds at all. Their web site isn't the
greatest. Anyway, last time I bought FSLXX was 3/10/08.




Brian

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D

Default User

Default said:
Mark Freeland wrote:

I think they list all MM funds separately. That being said, I can't
get the MM screener to list any funds at all. Their web site isn't the
greatest. Anyway, last time I bought FSLXX was 3/10/08.
Ok, I got the MM fund screener working. It indeed shows FSLXX:

FSLXX
Fidelity Sel Money Mkt 2.66% 4.47% 4.47% 3.18%


It also has Vanguard MM funds, like:

VMMXX
Vanguard Prime MM;Inv 2.25% 4.36% 4.47% 3.18%



I don't know why they don't put the MM funds in with the fund families.




Brian

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