Vanguard target retirement funds

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The Vanguard target retirement funds [1] are lifecycle offerings, providing investors with a variety of highly diversified all-in-one portfolios. The products are structured as funds-of-funds, charging only weighted averages of the expense ratios associated with the underlying holdings, which are primarily indexed. While the funds are ostensibly designed for investors retiring in a given year (approximately), they may be used for other goals or for markedly different retirement dates, depending on a particular shareholder's objectives and risk tolerance. The funds have a low $1,000 minimum investment for opening a fund account.

Each of the funds, excepting the Vanguard Target Retirement Income Fund] (TR "Income") [2], has a date specified in its name. The funds become more conservative over time, shifting their asset allocations from equities toward fixed income. The funds' prospectus [3] indicates that within seven years of the stated date, a given offering's asset allocation will come to resemble that of TR Income Fund [4] which has a static allocation and is intended primarily for the needs of retired persons.

As of 2/2011, the twelve target retirement funds hold a total of about $120 billion in assets; (for comparison, Vanguard 500 index holds $105 billion).

Vanguard LifeStrategy funds are similar to TR Funds. Both LifeStrategy funds and target retirement funds can be used as an all-in-one portfolio. For more information on comparing LifeStrategy funds with Target Retirement funds, see Vanguard funds: life strategy funds vs target retirement funds. For academic research on Target Retirement funds, please refer to Target date retirement funds.

Choosing a target retirement fund

Imbox notice.png Vanguard's Investor Questionnaire is designed to assist investors with choosing an asset allocation. (Select: "Begin the Vanguard Investor Questionnaire")


Target retirement funds are marketed for investors who want simplicity of managing their investments. These funds make assumptions about their potential investors; one of which is asset allocation, the single most important decision an investor has to make. They can not know the amount of risk willing to be undertaken by the individual investor.

When choosing a fund, the Bogleheads recommendation is to ignore the fund's date. Instead, determine the amount of risk the investor is willing to tolerate and work backwards to find a fund that matches the chosen stock/bond allocation. The investor may be surprised to find a large discrepancy between the planned retirement date and the fund's target date. Remember that the fund does not know the individual investor.

There are some disadvantages to this method (see below), but the beginning investor should not be dissuaded. Rebalancing at a later time is always an option, especially if the fund is held in a tax-advantaged account.

Advantages

Diversification

With the purchase of a single fund, investors gain exposure to a broad portfolio of US and international stocks, and thousands of US and international bonds. These funds are excellent choices for investors who don't have the required initial minimum investments for purchasing separate funds.

Asset allocation on autopilot

Asset allocation is managed professionally by Vanguard. It will change automatically as investors get closer to retirement.

Criticisms

While TR Funds provide very simple diversification for their shareholders, such uniform solutions will necessarily be subject to reasonable criticisms.

Mismatch between target retirement year and asset allocation choice

The funds set an asset allocation for a given target retirement year. Not all investors want the same allocation even if they will retire in the same year. Some may find the TR fund's allocation for their target year too aggressive or too conservative. If these investors select a TR fund by its current asset allocation, and not the target year, they may find that the fund shifts its asset allocation either too soon or too late.

For example, suppose you plan to retire in 2030, but you think the 85% stocks 15% allocation in Vanguard Target Retirement 2030 Fund is too aggressive for your need, ability and willingness to take risk. Instead, you like the allocation in Vanguard Target Retirement 2015 Fund, which currently invests approximately 65% in stocks and 35% in bonds. If you invest in Target Retirement 2015, however, at some time close to 2015, the fund will shift its allocation more conservatively, while you are still at least 15 years away from your planned retirement. On the other hand, if you'd like to be more aggressive and invest in Target Retirement 2035 while you plan to retire in 2015, you may find the allocation in Target Retirement 2035 not shifting when you need a less aggressive allocation after you retire.

Tax inefficiency

Because the TR Funds all have an increasing and/or large allocation to taxable bonds, they are most suitable for investors holding their entire portfolios in tax-advantaged accounts. They also might be appropriate for individuals with entirely taxable portfolios, if there is high likelihood of a low tax bracket for the intended holding period, which is usually a lifetime. Investors having both taxable and tax-advantaged accounts are generally better served by splitting their equity and fixed income allocations, concentrating on tax-efficient asset location.

TR funds historical distributions:

Allocation choices

Depending on an investor's personal preferences, the TR Funds' asset allocations could be unsatisfactory. Some example reasons follow.

  • Certain asset classes are not represented, such as high-yield bonds and commodities. Inflation-protected securities are added to the funds' allocation only as the target date nears.
  • The Funds' asset class weightings do not suit all tastes. 70% of equities are domestic, which is above the actual U.S. share by world market capitalization. There is no "tilt" to the U.S. stock holdings; for instance, REITs are represented only to the extent they appear in Total Stock Market Index.

Expenses

TR funds are cheap by any reasonable standard, with Vanguard target retirement fund expense ratios varying from 0.18% to 0.19%. In fiscal year 2008, the average peer group expense ratios ranged from 1.11% to 1.32%. Other mutual fund companies' target retirement fund expense ratios may also include an additional expense ratio on the fund itself, in addition to the expense ratios of the underlying funds. Vanguard does not charge this type of fee, but investors using target retirement funds in their workplace plan from another mutual fund company should look in the prospectus for this possible extra expense.

Despite the already low expense ratios, Vanguard could theoretically create even cheaper versions. The underlying holdings are presently all investor class but all the funds utilized already have admiral and institutional share classes. Admiral class TR funds would theoretically serve individual shareholders with substantial balances, whereas institutional class TR funds would theorectically serve workplace retirement plans. On the other hand, Vanguard incurs substantial costs in creating and maintaining the TR vehicles. These costs are not passed on directly to their shareholders, and the absence of additional share classes could be viewed as a sort of reimbursement.

Summary asset allocation

As of December 2012, TR Fund asset allocations range from 90/10 (stock/bonds) to 31/69 (stocks/bonds+cash).

TR Fund Asset Allocations - December 2012
Holding 2060 2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 Income
Stocks 90.1 90.1 90.1 90.1 90.1 86.0 78.5 71.0 63.6 55.1 42.1 30.4
Bonds + Cash 9.9 9.9 9.9 9.9 9.9 14.0 21.5 29.0 36.4 44.9 56.9 69.6

Detailed fund allocations

As of June 2013, the TR Funds' equity allocations varied from 30% (TR Income) to 90% (TR 2040-2060). More detailed allocation information is provided in the following table. Continuous updates of these figures are available at Vanguard Institutional


TR Fund Underlying Percentage Holdings - June 2013
Holding 2060 2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 Income
Vanguard Total Stock Market Index Fund 63.2 63.2 63.2 63.4 63.4 60.2 55.1 49.7 44.4 38.3 29.3 21.2
Vanguard Total International Stock Index Fund 26.7 26.7 26.6 26.5 26.5 25.1 22.7 20.6 18.4 15.7 12.1 8.9
Vanguard Total Bond Market II Index Fund 8.1 8.1 8.1 8.1 8.1 11.8 17.8 23.7 29.8 32.2 35.4 39.6
Vanguard Total International Bond Index Fund 2.0 2.0 2.1 2.0 2.0 2.9 4.1 5.8 7.4 9.2 11.8 14.1
Vanguard Short-Term Inflation-Protected Securities Index Fund 4.6 11.4 16.2

History

Vanguard's launched its first six TR Funds on 10/27/2003: TR 2045, 2035, 2025, 2015, 2005, and Income. Five additional funds were opened on 06/07/2006: TR 2050, 2040, 2030, 2020, and 2010. The TR 2055 fund was opened on 8/10/2010; the TR 2060 fund was opened on 01/19/2012. The funds' fiscal year ends on 9/30 of each year.

2006 target retirement changes

In March 2006 Vanguard made changes to the asset allocations of its existing TR Funds, increasing their aggressiveness with a larger equity allocation of roughly 10 to 20 percentage points, depending on the fund. [5] The original TR Fund allocations are provided in the Funds' preliminary prospectus, dated 08/05/2003. Note the five year differential in making comparisons with current breakdowns.

Original TR Fund Underlying Percentage Holdings - October 2003
Holding 2045 2035 2025 2015 2005 Income
Vanguard Total Stock Market Index Fund 72 64 48 40 35 20
Vanguard European Stock Index Fund 13 11 08 07
Vanguard Pacific Stock Index Fund 05 05 04 03
Vanguard Total Bond Market Index Fund 10 20 40 50 50 50
Vanguard Inflation-Protected Securities Fund 15 25
Vanguard Prime Money Market Fund 05

2010 target retirement fund changes

On September 27, 2010, Vanguard announced that it would replace the three underlying international portfolios with a single broad international stock index fund. Vanguard also increased the overall international equity exposure of these funds from approximately 20% to approximately 30% of the equity allocations.

Under the simplified approach, most of the Target Retirement Funds will comprise three broad index funds. Target Retirement Funds with target dates greater than five years from the current year offer allocations constructed using only three funds:[6][7][8]. As the funds transition into the Target Income portfolio, the funds add an inflation-indexed bond fund and a money market fund to the strategic asset allocation.

Allocations in the funds, prior to the change, are documented in the following table, dating from October, 2008.

TR Fund Underlying Percentage Holdings - October 2008
Holding 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 Income
Vanguard Total Stock Market Index Fund 72.2 72.1 72.0 72.1 68.2 62.2 56.3 50.2 42.9 32.8 24.3
Vanguard European Stock Index Fund 9.8 9.9 10.0 9.9 9.4 8.5 7.8 6.9 5.9 4.6 3.5
Vanguard Pacific Stock Index Fund 4.5 4.5 4.4 4.6 4.1 4.0 3.4 3.1 2.7 1.9 1.5
Vanguard Emerging Markets Stock Index Fund 3.7 3.7 3.9 3.7 3.6 3.3 3.1 2.6 2.2 1.7 1.3
Vanguard Total Bond Market Index Fund 9.8 9.8 9.7 9.7 14.7 22.0 29.4 37.2 40.0 42.2 44.6
Vanguard Inflation-Protected Securities Fund 6.3 14.2 19.4
Vanguard Prime Money Market Fund 2.6 5.4

2011 target retirement fund changes

On May 11, 2010 Vanguard announced [9] that it was dropping the minimum investment in its target retirement funds from $3,000 to $1,000.

2013 target retirement fund changes

In June 2013 Vanguard added the Vanguard Total International Bond Index Fund to the Vanguard target retirement funds. The new international bond fund represents 20% of the fixed income allocation for each of the funds.

Vanguard also replaced the Vanguard Inflation-Protected Securities Fund with Vanguard Short-Term Inflation-Protected Securities Index Fund in Vanguard Target Retirement Income Fund, Vanguard Target Retirement 2010 Fund, and Vanguard Target Retirement 2015 Fund. [10]

Table.

(view Google Spreadsheet in browser or download as xls, ods, or pdf)

The allocations prior to the change are indicated in the table below.

TR Fund Underlying Percentage Holdings - December 2012
Holding 2060 2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 Income
Vanguard Total Stock Market Index Fund 62.9 62.9 62.9 62.9 62.9 60.0 54.8 49.4 44.3 38.3 29.9 24.3
Vanguard Total International Stock Index Fund 27.1 27.1 27.1 27.1 27.1 26.0 23.7 21.6 19.3 16.8 13.2 9.2
Vanguard Total Bond Market Index Fund 9.9 9.9 9.9 9.9 9.9 14.0 21.5 29.0 36.4 39.8 41.6 44.7
Vanguard Inflation-Protected Securities Fund 5.1 13.6 19.9
Vanguard Prime Money Market Fund 1.7 5.0

See also

External links

Forum discussions

Institutional research

References

  1. Target Retirement List link
  2. Vanguard Target Retirement Income Fund (TR "Income")
  3. prospectus
  4. TR Income Fund
  5. Vanguard press release, 2006.
  6. Vanguard:Changes In Target Retirement Funds, forum discussion
  7. Vanguard adjusts international equity exposure in Target Retirement Funds and other balanced funds
  8. Vanguard streamlines construction and improves diversification of Target Retirement Funds
  9. Vanguard cuts fund minimums, opens door to new investors
  10. International bond index fund and ETF now available, Vanguard news release, June 14, 2013