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Simpler and Cheaper

Mike Zaccardi, 12:26 pm ET

VANGUARD GROUP today announced significant price cuts for its fleet of target-date retirement funds. Currently, investors can own a Vanguard target fund for the seemingly low cost of 0.12% to 0.15% a year, equal to $12 to $15 for every $10,000 invested. The new price tag will be just 0.08%, effective February 2022.

It might not seem like much, but the price cuts announced today will deliver an aggregate savings of $190 million to investors in 2022, says Vanguard. Price competition continues to be fierce in the investment management business. In a world of zero-dollar trading commissions and zero-cost index funds, financial firms are under intense pressure to lower expenses for investors.

Vanguard’s target funds are globally diversified portfolios built using index funds, effectively offering investors one-stop investment shopping. With the price cuts, its target-fund expenses will be on par with Charles Schwab’s target-index funds and below those of archrival Fidelity Investments.

By lowering costs, Vanguard also addresses a longstanding complaint among its cost-conscious investors. Currently, Vanguard investors can save a few “basis points” by purchasing a target fund’s component index funds, thereby creating their own target fund. With the fee reduction, building your own target-date fund using the component parts won’t make much cost difference. The upshot: Vanguard investors will have the option to make their financial life simpler—by swapping over to a single target-date fund.

This morning, Vanguard also announced that more 401(k) plans will have access to its institutional target funds, which have even lower costs. The new plan minimum will be $100 million, down from $250 million.

In addition, Vanguard said it was introducing a new mutual fund, the Vanguard Target Retirement Income and Growth Trust, which is geared to retirees. The new fund will have a 50% stock allocation, higher than the 30% allocation used by the existing Vanguard Target Retirement Income Fund. Perhaps that higher stock allocation reflects the challenge of making a nest egg last over a 30-year retirement, while also generating decent returns in today’s world of tiny bond yields.

Many market strategists, including those at Vanguard, expect low stock and bond market returns in the years ahead. What to do? We can make sure we keep more of whatever the markets deliver—by keeping costs to a minimum. Vanguard’s target-fund price cuts will allow everyday investors to do just that, while also radically simplifying their financial lives.

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Kevin Knox
Kevin Knox
2 months ago

Vanguard is indeed looking at including private equity in some of its Target Date funds. Here’s the link:

https://institutional.vanguard.com/offers/target-date-funds.page

(I intended to post this as a reply to Mr. Clements’ comment below but apparently posted it in the wrong place. I apologize).

Last edited 2 months ago by Kevin Knox
Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Kevin Knox

None of us know what Vanguard will do. But I wouldn’t avoid Vanguard’s TDFs based on something the firm might do. The page you cite is geared toward institutions — those overseeing 401(k) and 403(b) plans. Vanguard might launch a set of new TDFs geared solely to that market. Moreover, the wording suggests that, if it did add private equity, it may indeed be with a new set of TDFs, rather than changing existing funds: “We’re constantly debating ways to make our target-date funds even better for you and your participants. This includes the potential to offer TDFs with different equity landing points and offering products that include different asset classes, such as ESG and private equity.”

Last edited 2 months ago by Jonathan Clements
Jonathan Clements
Admin
Jonathan Clements
2 months ago

An additional point: Unless the folks at Vanguard are complete idiots (and we should never entirely discount that possibility), why would they cut expenses on retail TDFs to 0.08% if they were then going to add private equity and active funds, which would presumably necessitate increasing expenses?

Kevin Knox
Kevin Knox
2 months ago

Unfortunately the good news on the expense ratios is more than offset by Vanguard’s plan to change the stock allocation (again) in these funds – this time by including up to 30% actively-managed private equity in them. As is well-known by long-time Vanguard customers, there have been many other changes, often on quite short notice, to their Target Date and LIfeStrategy funds, including ramping up the international equity to 40% (which has been nothing but a negative) and inclusions of a substantial allocation to international bonds (which has added useless complexity). But this latest proposed change is potentially quite consequential and of course is completely at odds with the set-it-and-forget-it appeal of such funds. Much anger and consternation about this on the Bogleheads forum (see link below). Vanguard however is focusing on selling its percentage-of-assets Personal Advisory Services rather than serving existing customers or honoring Jack Bogle’s intentions. Investor beware.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=359024&sid=2a4833d1cd28f3ff1f834fe3a06138e3

Mike Zaccardi
Mike Zaccardi
2 months ago
Reply to  Kevin Knox

The global equity market is 40% non-US stocks, so a 60/40 split US/non-US for the equity piece makes sense to me. International bonds add just a little diversification–excluding them all together seems wrong though. Also consider that Emerging Market bonds have been a growing piece of the ex-US bond index–that adds yield and diversification, too.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  Kevin Knox

Unless there’s major news that I’ve missed, I don’t believe there’s any plan to add actively managed funds to Vanguard’s target-date funds. Yes, there are plans to offer some “exclusive” actively managed funds to clients of its Personal Advisor Services — not something I thrilled about, either — but that’s completely separate.

https://pressroom.vanguard.com/news/Press-Release-Vanguard-Personal-Advisor-Services-to-Intro-Three-Active-Equity-Funds-082621.html

David Powell
David Powell
2 months ago

Love it!

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