Simpler and Cheaper

Mike Zaccardi

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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