Global Head of Portfolio Construction and Chief Economist, Americas
Roger Aliaga-Díaz, Ph.D., is global head of portfolio construction and chief economist for the Americas. His areas of expertise are economics, macroeconomic forecasting, and portfolio construction.
As a senior leader in Vanguard’s Investment Strategy Group, Roger is the vice-chair of Vanguard's Strategic Asset Allocation Committee, which oversees the asset allocation of multi-asset-class funds such as the Vanguard Target Retirement Funds. He is also a member of Vanguard’s Advice Policy Committee and the Dynamic Asset Allocation Council, and chair of Vanguard’s Time-Varying Asset Allocation subcommittee.
Roger and his global research team develop multi-asset-class strategies and conduct quantitative research on asset allocation, investment solutions, and retirement topics. Along with his team, Roger built two proprietary portfolio construction models that underpin the firm’s investment advice methodology around the globe: the Vanguard Life-Cycle Investing Model and the Vanguard Asset Allocation Model.
Before joining Vanguard in 2007, Roger served as a visiting professor of macroeconomics at Drexel University’s LeBow College of Business.
Roger has published numerous studies on investment and macroeconomic issues and has presented his research at various industry and academic conferences, including the Board of Governors of the Federal Reserve System, the American Enterprise Institute for Public Policy Research, and the American Economic Association. He is frequently interviewed by financial media around the world. Roger earned a B.A. in economics from Universidad Nacional de Córdoba, Argentina, and a Ph.D. in economics from North Carolina State University.
Head of Global Target Retirement and Goals-Based Investing Research
Nathan C. Zahm, CFA, FSA is the head of the target retirement and goals-based investing research in Vanguard’s Investment Strategy Group. Nathan leads the team responsible for creating the research underlying Vanguard’s target retirement, college savings, and other goal-based investing solutions in the US and abroad. His areas of expertise include investment strategy, retirement planning, and portfolio construction
Nathan joined Vanguard in 2011 as an investment actuary in Vanguard’s Investment Strategy Group (ISG). Before assuming his current role in 2019, he served as a senior investment strategist in ISG, leading teams in Vanguard’s Hong Kong and Australian subsidiaries from 2017‒2019 and 2015‒2017, respectively.
Prior to joining Vanguard, Nathan worked at Towers Watson as a consulting actuary for large U.S. defined benefit plans.
Nathan earned a B.S. in economics from the University of Maryland and is pursuing an M.B.A. at the Wharton School of the University of Pennsylvania. He is a CFA charterholder as well as a Fellow of the Society of Actuaries.
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How does Vanguard view the evolving role of target-date funds?
Target-date fund assets have experienced huge growth—from $8 billion at the turn of the millennium to a staggering $3.24 trillion at the end of 2021.1 That growth largely stems from the passage of the Pension Protection Act of 2006 in the United States, which allowed target-date funds to play a more dominant role in defined contribution plans and act as a qualified default investment. Today, 80% of all participants in Vanguard-administered defined contribution plans use a target-date fund. More than half of those participants use just one target-date fund as their sole retirement plan holding.2
For retirement savers, the availability of target-date funds has dramatically simplified the investment process while improving investment diversification. The managers of these all-in-one vehicles maintain the target mix through retirement, which helps free investors from the need to regularly rebalance.
What framework considerations does Vanguard use when measuring the success of a Target Retirement Fund glide path?
Vanguard has constructed several powerful tools that we use when vetting potential retirement glide paths. They include the Vanguard Capital Markets Model®, which considers a wide range of potential future market scenarios and economic conditions, and the Vanguard Life-Cycle Model, which incorporates a long list of investor characteristics such as demographics, risk tolerance profile, retirement funding needs, savings rates, expected retirement age, and guaranteed income sources such as Social Security or defined benefit pensions.
By using these models in concert, we can determine which glide path is most appropriate given investor needs and characteristics, while accounting for market uncertainty. The optimal glide path will identify the risk-return sweet spot—that point where potential risk and return align to an investor’s comfort level while, at the same time, providing sufficient assets to meet their spending goals through retirement.
The two most relevant variables we consider when measuring glide-path success are certainty fee equivalents, a single variable that captures a glide path’s combined risk and return profile by determining the amount of annual return an investor would give up to take one glide path over another, and the probability of success, which is the likelihood that a particular glide path will meet an investor’s spending goals through retirement across the full range of economic scenarios.3 We aim for a probability of success of 70% or more of meeting retirement spending needs until at least age 95.
What are the circumstances we consider when using these simulation models to develop potential retirement glide paths?
We serve a heterogeneous population: Wages evolve through time and across demographics, health care costs and savings rates vary, and longevity factors differ. We carefully consider which population averages and characteristics will help us design a Target Retirement Fund glide path that can give savers their best chance at investment success. In general, our Target Retirement Fund investors:
- Have a conservative risk tolerance.
- Save at the average rate for their age cohort.
- Want to retire at age 65.
- Expect 75% to 80% of their ending salary annually in retirement.
Still, we constantly review and reassess these assumptions, how sensitive the optimal glide path is to changes in these assumptions, and the range of observations in the population. We partner with thought leaders throughout Vanguard to make sure we understand the behavioral attributes of the people for whom we design these portfolios. Are retirement ages shifting? (Perhaps. Some forces, such as longer, healthier lives, are driving later retirements; others, such as COVID-19, are driving earlier retirements.) Have autoescalation features in 401(k)s changed how people save? (Yes, for the better.) Have the concepts of retirement and retirement income changed? (For second careerists and retirement business launchers, yes.)
Vanguard Target Retirement Funds are a straightforward investment option, but there is rigor behind the methodology. Our research team constantly tests the model to make sure our assumptions reflect real-world conditions (be they robust market returns, inflation, or volatility), include a range of possible asset classes, and reflect the needs and wants of modern-day retirement savers. We have a responsibility to investors who rely on this glide path to help carry them through retirement. We take that very seriously.
2 Data on TDF use in defined contribution plans is taken from How America Saves 2021.
3 See Vanguard, 2021. A Systematic Framework for Validating TDF Glide Paths.
Notes:
- For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
- All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
- 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. The Income Fund has a fixed investment allocation and is designed for investors who are already retired. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
- Vanguard is responsible only for selecting the underlying funds and periodically rebalancing the holdings of target-date investments. The asset allocations Vanguard has selected for the Target Retirement Funds are based on our investment experience and are geared to the average investor. Regularly check the asset mix of the option you choose to ensure it is appropriate for your current situation.