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Target date funds use asset-allocation strategies to help you invest for specific future goals, such as financing your retirement. As one of the largest mutual fund companies in the business -- and as one with a substantial business providing and managing 401(k) funds -- Fidelity has a full suite of retirement funds. Dubbed the Fidelity Freedom Funds, many have long track records that make it easy to assess their success.

A few years ago, however, Fidelity made a decision to add a somewhat different sort of product to its target date fund arsenal, and these offerings give investors an advantage that could produce a big boost to their returns over time. Let's look at what are likely to become Fidelity's top target date funds.

The 9 top target date funds from Fidelity


Ticker Symbol

Expense Ratio (Gross / Net)

Fidelity Freedom Index 2015 Fund


0.23% / 0.16%

Fidelity Freedom Index 2020 Fund


0.23% / 0.16%

Fidelity Freedom Index 2025 Fund


0.23% / 0.16%

Fidelity Freedom Index 2030 Fund


0.24% / 0.16%

Fidelity Freedom Index 2035 Fund


0.24% / 0.16%

Fidelity Freedom Index 2040 Fund


0.24% / 0.16%

Fidelity Freedom Index 2045 Fund


0.24% / 0.16%

Fidelity Freedom Index 2050 Fund


0.24% / 0.16%

Fidelity Freedom Index 2055 Fund


0.24% / 0.16%

Data source: Fidelity Investments.

As you can see, each of these funds has a year associated with it. The idea is that if you expect to need the money you're investing in that fund beginning in a certain year, then you should choose the target fund that is associated with that year. As an example, if you're 51 years old in 2016 and expect to retire at 65, then the 2030 version of the fund would be the natural fit for you.

What the Fidelity Freedom Index Funds invest in

What sets the Fidelity Freedom Index Funds apart from Fidelity's other target date funds is the index-based strategy that they follow. Each fund owns a combination of mutual funds in its portfolio. Those with target dates that are further in the future have a more aggressive mix of investments. Over time, the mix is gradually adjusted to a more conservative ratio, so those whose target dates are closer to the present will have shifted to a less stock-heavy asset allocation. The contents of the funds (though not their ratios) are generally the same. Fidelity went with its Total Market Index Fund for domestic stock exposure, and its Global ex U.S. Index Fund for international stocks. For bond exposure, Fidelity uses its U.S. Bond Index Fund and its Inflation-Protected Bond Index Fund. A commodity strategy fund and a money market fund round out the allocation options.

What makes each fund different is its specific allocation at any given time. For instance, right now, the 2030 fund has about 55% of its assets in U.S. stocks, 25% in international stocks, and 20% in bonds. The more conservative 2015 fund has just 40% U.S. stock exposure, 15% in international stocks, 35% in bonds, and about 10% in the money market fund. At the other end of the spectrum, the 2055 fund currently has a 90% stock and 10% bond split, with U.S. stocks accounting for almost 65% of the total portfolio and international stocks occupying the other 25% of the stock portion of the overall allocation.

The Fidelity index advantage

If you investigate Fidelity's offerings, you'll notice that it also offers non-index, actively managed Freedom Funds for each of the target dates listed above. However, the annual expenses for the corresponding funds are much higher, ranging from 0.64% for the 2015 fund to 0.77% for the 2055 fund.

So far, that cost difference hasn't produced an advantage for the index-fund-based options. And in fact, most of the actively managed funds having a slight performance edge over the past three years. However, what's particularly interesting is how the actively managed Fidelity target date funds managed to gain that marginal edge: Their asset allocations are a bit more aggressive  than their index-fund-based counterparts.

For example, the 2030 active fund has 60% U.S. stock exposure and just 15% in bonds, compared to %55 stocks and 20% bonds for the index fund. Over time, that higher exposure to the stock market should give the active funds a performance advantage, but it involves greater risk that many investors won't necessarily see.

Returns are only part of the equation in investing. As smart and Foolish investor, you should also make sure to examine whether an asset adequately rewards you for the risks it carries. In this case, Fidelity's index-based target date funds do a better job of providing solid returns with a lower potential risk of declines than its corresponding actively managed offerings.

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