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Should Target-Date Funds Be One-Size-Fits-All in Retirement?

Retirees have a more diverse set of needs than early accumulators, but that doesn't mean a target-date fund doesn't serve a purpose in deaccumulation, says Vanguard's John Croke.

Note: This video is one of several interviews that Morningstar director of personal finance Christine Benz had with Vanguard officials at this year's Bogleheads event. See all of the interviews here.

Christine Benz: Let's talk about target-date funds in retirement or target retirement as Vanguard calls them. It seems that once someone approaches retirement, the retiree would want to reserve the discretion to pick and chose where they go for cash flows from that portfolio. Right now, for example maybe you'd be pulling from stocks, because stocks have been going up. Do you think target-date funds as they are currently situated, constructed help solve for the issues that retirees face, or do you think that there is more work to be done in that area?

John Croke: It's a great question and it's one that we are asked, and we ask ourselves all of the time. There is a real fascinating conundrum when it comes to building a one-size-fits-all or one-size-fits-most product for 22-year-olds all the way to 65-year-olds and 80-plus-year-olds. That has to do with, what are the needs and objectives of investors at different points along their life cycle. For most people that are younger, that are in that accumulation phase, they are going to be very well served by equity heavy, diversified asset allocation. But as you get closer to retirement and into retirement the uniqueness or the heterogeneity of circumstances, objectives, preferences of individual investors disperse and the efficacy of a one-size-fits-most product, we still think it's an appropriate solution for investors. We've created in a way that is fully liquid and flexible for investors that, hey, they want to stick with it and implement either an ad hoc or maybe perhaps a systematic withdrawal strategy. We've built the glide path with you in mind.

If you are an investor who maybe started out less engaged in your investing career, become more engaged, appreciate that you have some unique circumstances, maybe you want to bring in partner's financial picture into solving the household retirement puzzle and you want to work with an advisor--again, we’ve given you a reasonable asset allocation that if you decided to leave the target-date fund and work with an advisor, we've given you an asset allocation that’s probably not going to look too different from where an advisor who is building around your unique household circumstances would put you.

I'd say the same thing for that cohort of investors that really want that security in retirement and might be inclined to reach out to an insurance company and say I want to annuitize a portion of my nest egg. Again, we've given you an asset allocation that if you do make that decision and move a significant portion of your assets into annuity,  we haven't boxed you in, so to speak. We want to create something that is appropriate, suitable for most households. We don't want to box in around some narrow definition of what is in every person's best interest in terms of a withdrawal rate or how best to convert wealth into spending in retirement.

When we look at the data, we serve 20 million investors across Vanguard. When we look at how people are spending down their money in retirement, it is a very wide distribution and you just need to be mindful of that and not overengineer that one-size-fits-all product. I think when we are talking about solving a similar problem in the future it's much more looking at how can we deliver some of the benefits of target-date funds--low-cost, diversification, ease of use--how could we maybe do that in an advice setting for different types of investors.

Benz: John great to get your insights. Thank you so much for being here.

Croke: No problem, my pleasure.

Benz: Thanks for watching. I'm Christine Benz from