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Freedom funds: a long-term investment for your future.

During NTCA's regional meeting benefit workshops this year, members often asked, "What can NTCA do to advise savings plan participants how to invest in the current market environment?" Our answer: have a long-term asset allocation in place that diversifies your investments over several different asset classes. Then, in times of market volatility, you should stay with your allocation, rebalancing as appropriate to keep your actual investments in line with this allocation.

Unfortunately, many of our participants do not seem to have established a long-term asset allocation policy that provides them adequate diversification. In fact, Fidelity Investments' statistics on the savings plan show that close to 70% of participants who are under 36 have all of their money in one fund, the Fixed Fund, which is the most conservative option in the plan. More than half of our participants who are between 36 and 50 have adopted this same strategy.

This type of asset allocation, where the participant chooses the "safest" investment, where safest is defined as the investment that will not lose money. may seem to be wise in a period of down markets. The savings plan's "safest" fund( the Fixed Fund) has returned 5% to 6% each year during the past two years when many other options have lost money.

However, a 30 year old with all of his money in the Fixed Fund will not be able to avoid the risk of not having the long-term growth needed to meet his retirement goals, which is a risk far greater than the short-term risk of losing money in a less conservative plan.

In looking at how they could address this problem, the Retirement & Security Program/Savings Plan Trustees found that Fidelity had an answer that they hope will appeal to many of the young-to-middle-aged participants in the savings plan. The answer: the Fidelity Freedom Funds.

Starting in 2003, the trustees will add four of these funds -- Freedom Fund 2010, Freedom Fund 2020, Freedom Fund 2030 and Freedom Fund 2040 -- to the plan's investment mix. Each fund allows the participant to make a one-time decision as to what year he will retire. Once he makes that decision, he targets the Freedom Fund that has the date closest to his retirement date and lets Fidelity take over the day-today diversification of those assets. Fidelity's approach seeks to have the participant aggressively invested when he is young and more conservatively invested as he approaches his anticipated date of retirement.

Interestingly enough, savings plan participants could achieve the same level of diversification the Freedom Funds offer by using the 12 funds available through the NTCA savings plan to allocate assets between domestic and international stocks, bonds and stable value instruments. However, participants who elect to take this approach and make their own initial allocation and rebalancing decisions may encounter some problems trying to determine when and how to modify their allocations to reduce risk as retirement nears.

While a savings plan participant with some investment knowledge can make such shifts effectively, those who are not comfortable doing so, or those who do not have the time to let the investment run without rebalance on a regular basis, will find that the Freedom Funds relieves them of that burden, for Fidelity does the rebalancing for them.

The trustees for the plan are hopeful that many of the plan's participants will find that these new funds give them the key to obtaining the necessary diversification they have known about but were afraid or unwilling to tackle on their own. And those who are comfortable with a self-directed diversification strategy still will have the individual funds available to put their desired mix in place and manage it.
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Title Annotation:Fidelity Investments
Author:Arrington, Roland
Publication:The Exchange
Article Type:Advertisement
Geographic Code:1USA
Date:Oct 1, 2002
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