Fidelity Investments is the undisputed king of 401(k) plans, but its lineup of retirement-orientated mutual funds conspicuously lags lifestyle funds offered by competitors like T. R. Price and Vanguard, according to a new Morningstar "Fund Spy" column. Lifestyle funds gradually dial down aggressive portfolio components as the years draw closer to retirement dates like 2040.

Fidelity offers its own variation on lifestyle funds-of-funds, the Fidelity Freedom lineup, but Morningstar says they are hamstrung by a noticeable overlap in underlying investments. Vanguard and T. Rowe are more successful in offering diversified retirement-date investments with less overlap in portfolio holdings, according to "Fund Spy." For example, the Freedom Fund 2020 is a composite of 18 separate proprietary funds, including three large-cap blend funds, three large-cap growth funds and one large-cap value fund. Mornginstar also cites additional overlap in fixed-income holdings of the Fidelity Investment-Grade Bond and the Fidelity Intermediate Bond funds, which are also found in the Freedom 2020 portfolio.

"Put simply, the firm needs to cut the fat," Morningstar's Kunal Kapoor writes. "The lineup should consist of the firm's best funds, and that's it. Distributing assets among so many funds is unnecessary."

By comparison, Vanguard's Target Retirement 2025 Fund includes separate funds that track only four indexes. In addition, T. Rowe Price Retirement 2020 invests in only 10 funds.

What is also missing from the Freedom Funds is Fidelity's best funds, like Contrafund, but mediocre investments like Fideilty OTC often make their way into the retirement portfolios, according to Morningstar. The fund research firm also criticizes Fidelity for tacking eight basis points on top of the already-expensive underlying funds.

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