Fidelity Freedom Income (FFFAX) is an interesting retirement fund. The problem is that no more than 20% can be invested in equities. While this may appear to be safe, it limits investors' upside. And as the average lifespan increases, the retirement savings that many baby boomers expect to see them through old age are falling short in many cases.
| Funds that can take a toll | |||
| Fund | Category | Expense ratio | 3-year return (annualized) |
|---|---|---|---|
| Vanguard Long-Term Treasury Admiral (VUSUX) | Long government | 0.1% | 3.9% |
| Fidelity Freedom Income (FFFAX) | Retirement income | 0.0% | 4.1% |
| Prudential Jennison Natural Resources (JNRRX) | Natural resources | 1.4% | 3.6% |
| Calvert Income B (CBINX) | Intermediate-term bond | 2.1% | 2.4% |
| Putnam Global Health Care A (PHSTX) | Health | 1.3% | 4.2% |
Prudential Jennison Natural Resources
For the past decade, commodities have been a tremendous investment. As investors continue to pour large sums into natural-resource mutual funds, more 401k plans are offering these options.
While it is a good idea to have exposure to hard assets, there should be some restraint. Commodities can be quite volatile. Also, they have been prone to long-term bear markets, as was the case from 1980 to 2000.
Prudential Jennison Natural Resources (JNRRX) has benefited from investor interest in commodities. The fund has $6.4 billion in assets and had a 34.7% return last year, in part due to its asset mix -- roughly half of the fund was invested in energy and the rest was in the mining sector. A good year, but the fund has certainly been a wild ride -- in 2008, it lost 53% of its value.
Calvert Income B
The expense ratio is a measure of what it costs an investment company to operate a mutual fund. On its face, a fund's expense ratio looks small. But if it reaches 2% or higher, it can eat into returns.
The impact is often the most significant for bond funds, which tend to have lower returns than equity funds.
Calvert Income B (CBINX) is an intermediate bond fund with an expense ratio of 2.1%. Over the past year, the fund returned 4.8%, but over the past three years, the average annual return was just 2.3%.
When you do the math, you see that returns on a high-expense fund like Calvert Income aren't as healthy as they should be, thanks to the fees.
Check your 401k funds to make sure you're not in one of these high-expense funds.
Putnam Global Health Care A
Specialized funds are in another danger zone for investors. These instruments focus on a particular industry or country. The problem is that the volatility can be wrenching. It can be extremely difficult to time the ups and downs in these funds.
Putnam Global Health Care A (PHSTX) focuses on health companies with strong growth prospects.
Unfortunately, it has been mostly dead money for the past decade, earning an average annual return of only 1.7% over the period.
This article was reported by Tom Taulli for InvestorPlace.
