There was an interesting launch this week from Vanguard in its new “target date” funds, which aims to entice investors to put in their funds into a single fund for a target retirement date. Vanguard’s new target fund is for 45 years down the road via the Vanguard Target Retirement 2055 Fund.
This is the 12th such target date fund from the company that seeks to keep larger exposure to equities at younger ages, and gradually rolling to fixed income as retirement age gets closer and closer. The fund is aimed at investors 18 to 22 years old who plan to retire and leave the workforce in or within a few years of 2055. Allocations will start at 90% equities and 10% bonds. That will eventually get to 50% and 50% between the two classes and will ultimately get to 30% equities and 70% bonds.
Where this class, and ultimately this fund, comes into play is via low expense ratios, as this one is expected to be 0.19%. Vanguard pulled some data from Lipper and said that the expense ratio compares to a peer-average target fund expense ratio of 1.17%. In an era of low returns on investments from stocks and on and off in bonds, a level of nearly 1% will make a huge difference on an apples to apples basis through time.
Many investors argue that their brokerage commissions or money management fees eat up all of their returns through time because of the bad years thrown into the mix. Pretend that your only ambition is to break even. A bad goal, but it is better than many have done in recent years. Pretend you start with $100,000.00. At 0.19% on a static $100,000.00 comes to $190.00 per year or $8,550.00 over a 45-year period. At 1.17% on a static $100,000.00 comes to $1,170.00 per year or $52,650.00 over a 45-year period.
Whether you are wary of investing or not, many have become so. Vanguard shows why: “Over the past few years, the stock market has dropped 57%, rallied 86%, and subsequently declined 8%, leading to the potential for an entire generation to become wary of investing.”
The 2055 Fund will invest in other low-fee index funds within the Vanguard family. It does include U.S. stocks and bonds, but also gives exposure to emerging market and developed markets stocks. Here is the initial allocation of the Vanguard Target Retirement 2055 Fund (VFFVX) by individual funds:
- Vanguard Total Stock Market Index Fund (71.8%)
- Vanguard Total Bond Market II Index Fund (10.1%)
- Vanguard European Stock Index Fund (8.6%)
- Vanguard Pacific Stock Index Fund (4.8%)
- Vanguard Emerging Markets Stock Index Fund (4.7%)
The target date funds have grown rapidly since their inception in 2003 with total aggregate assets of nearly $67 billion as of July 31, 2010. Vanguard also notes that one-third of all Vanguard defined contribution participants have all or part of their retirement plan account invested in a target-date fund.
This is not the first of its kind nor is Vanguard the only fund management group to have target-date funds.
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