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Vanguard bringing lower costs to target retirement fund investors

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Vanguard is expanding its family of low-cost target-date funds, with plans to introduce a new Institutional Target Retirement Fund lineup. 

Twelve new funds with an estimated expense ratio of 0.10% will be offered to institutional investors with a total USD100 million minimum initial investment. (This minimum is at the plan sponsor level; there is no balance requirement at the individual participant level*.) The new fund series is expected to launch by the end of the second quarter. 

“Single-fund options have revolutionised the retirement savings landscape,” says Vanguard CEO Bill McNabb. “Professionally managed, diversified investment options such as Target Retirement Funds have helped enhance the future financial security of investors by providing a sophisticated asset allocation and a disciplined, long-term strategy in an all-in-one-fund offering.” 

The use of target-date funds has increased significantly in recent years, primarily through 401(k) defined contribution plans. More than half of participants in 401(k) retirement plans at Vanguard invest in a target-date fund, and 86% of 401(k) and other defined contribution plans at Vanguard offer a target-date fund. Vanguard research has shown that professionally managed allocations in defined contribution plans, such as target-date funds, have dramatically improved portfolio diversification and helped reduce extreme risk levels for participants. 

Vanguard has also announced plans to increase the international exposure in its all-in-one funds. The international equity allocation of Vanguard’s Target Retirement Funds and LifeStrategy® Funds will increase to 40% from 30%, and the international fixed income allocation will increase to 30% from 20%. 

“International holdings are a valuable diversifier in a balanced portfolio, giving shareholders exposure to return streams that don’t move in lockstep with the US markets. It has become easier to capture these diversification benefits as the costs of international investing have decreased,” says Vanguard Chief Investment Officer Tim Buckley. “We carefully debate the merits of proposed changes to our Target Retirement Funds and other funds-of-funds, and make them when deemed to be in the best, long-term interests of our clients.” 

Vanguard research has demonstrated that non-US equities have diversified the returns of US equities on average over time, while the primary factors driving international bond prices are relatively uncorrelated to the same factors for US bonds, providing a diversification benefit. 

The overall strategic asset allocation and glidepath of these Target Retirement Funds will not change. The expense ratios of the Target Retirement Funds, ranging from 0.16% to 0.18%, are not expected to change with the added international exposure. Investment allocation changes are expected to be complete by year-end. 

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date. 

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