Vanguard Target-Date Retirement Series
The original low-cost choice is still a cut above most peers.
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Vanguard Target Retirement continues to stand above peers thanks to its simple approach and extremely low costs. It earns a Morningstar Analyst Rating of Silver for its single share class.
In February 2022, this series’ institutional shares were merged into its investor shares. As a result of the merger, shareholders in the investor share class saw fees drop to 0.08% from 0.14% and shareholders in the institutional shares got a 1-basis-point reduction to 0.08%. The series is now tied for the cheapest target-date mutual funds available that don’t have a high minimum investment attached. These ultra-low fees provide an enduring edge for the series to outperform peers.
This series is emblematic of Vanguard. It features low-cost, broadly diversified index funds to gain efficient exposure to global stocks and bonds. The glide path starts with 90% equity exposure until 25 years to retirement and continues to decline until arriving at a 30% equity stake seven years after retirement. The series' equity glide path deviates the most from the peer average near retirement when account balances are likely near their peaks. Five years from retirement, the glide path has 59% equity exposure, 5 percentage points higher than the norm, and at retirement it has 50% equity exposure; 7 percentage points higher than the norm, leaving investors more vulnerable to sudden market drops near the retirement date. This could make it harder for more conservative investors to stick with the funds during rocky periods. In the first quarter of 2020, for example, the 2020 Institutional share class lost 10.7%, just below the Morningstar Category average of 10.1%. Since the bear market was short-lived, investors that were able to stomach the temporary drop in their nest egg were ultimately rewarded. For the full year, the fund gained 12%, outpacing the category norm by 2 percentage points.
The team overseeing the series has been forward-thinking. It was one of the first to increase its allocation to non-U.S. stocks and bonds to better reflect the global market. The series’ huge size, $1.19 trillion as of the end of 2021, does somewhat limit the ability to add new asset classes to the portfolio. The team now has the leeway to use up to 2% of assets to buy equity index and interest-rate futures to help keep the desired asset-class exposures in place during market dislocations. It’s a smart move that should keep the series, and shareholders, on the right glide path.