Fidelity Investments is the giant of ‘‘target date’’ mutual funds, one of the hottest ideas in 401(k) plans. For its customers, the payoff has hardly been outsized.
Target date funds are supposed to make investing hassle-free — and safer — by automatically shifting from stocks to bonds as investors near retirement. But research shows many Fidelity target date funds have routinely turned in worse returns in recent years than their biggest peers.
The Fidelity funds, it turns out, made smaller bets on stocks than their big competitors. That was a smart move in 2008, when stocks plunged. Since then, however, the broad stock market has rallied, and the Fidelity funds missed out, relatively speaking.
The performance was particularly bad during the last three months of 2012, when 13 out of Fidelity’s 14 target date fund groups performed worse than at least 75 percent of their competitors, according to quarterly data that will be released by Morningstar.
Investors have flocked to target date funds in part because fund companies aggressively market them as easy to use. But big investment companies have taken somewhat different approaches to managing these funds.
Asset managers essentially disagree about one of the most basic questions in investing: How much risk should you take as you get older?
At T. Rowe Price and Vanguard, the other leading companies in this field, larger bets on stocks have helped target date funds outperform a majority of comparable funds over the last one, three, and five years, according to a recent analysis done by the Center for Due Diligence. At Fidelity, the majority of target date funds have done worse over those periods. The three companies together control 76 percent of the $485 billion in target date funds.
The difference conflicts with the popular perception that the funds are homogeneous investment vehicles that require little oversight. Many companies offer their employees only one set of target date funds in 401(k) plans and use the funds offered by their retirement fund administrator. As one of the biggest such administrators, Fidelity has a significant edge in attracting money.
The low level of investor engagement required by target date funds is what has helped make them so popular since they were created in the 1990s. Retirement savers poured $55 billion of new investment into target date funds last year, a year in which billions of dollars were flowing out of normal stock mutual funds.
Still, investors appeared to be responding to Fidelity’s lagging returns. Last year, the amount of money flowing into Fidelity’s target date funds was significantly smaller than the amount going into funds run by Vanguard or T. Rowe Price.
Fidelity has defended its strategy. Derek Young, the president of Fidelity’s Global Asset Allocation business, said that he was more interested in protecting savers from the ‘‘downside’’ of market turmoil than he was in capturing the ‘‘upside’’ of big market rallies.
“We are sensitive to making sure we’re not overly aggressive,’’ said Young.
Fidelity is taking steps to make up for its shortcomings. It introduced an index-based target date fund in 2009. In its older funds, Fidelity has put some money into a few Fidelity mutual funds it had not used in the past, that have had better performance records.
‘‘We’ve long criticized them for not using their best managers,’’ said Janet Yang, a Morningstar analyst. ‘‘It bodes well that they have added the new funds.’’