Actively managed funds can be a successful part of defined contribution plans, providing participants with the opportunity to outperform market benchmarks—albeit with additional risks.
In a new research paper, our workplace advice methodology makes the case for incorporating actively managed funds in retirement portfolios using a framework that considers the investor’s unique goals, the balance between the investor’s risk-return preferences, investing costs, and the investor’s ability to stick with the strategy over the long term.
Our framework begins with an evaluation of the plan’s fund lineup. Vanguard’s team of investment specialists takes a collaborative, hands-on approach, working closely with plan sponsors and consultants. The team uses criteria that are both quantitative (evaluating factors such as expense ratios and turnover ratios) and qualitative (working with portfolio managers to understand investment strategies and identify potential risks) to assess the suitability of active funds.
Once the team identifies suitability of those actively managed funds, they construct active bundles by creating weighted combinations of the funds within each sub-asset class. These bundles are optimized using risk-based techniques to balance diversification and expected returns. The active-passive allocation is determined for different levels of active risk tolerance—high, medium, and low—using the Vanguard Asset Allocation Model and the Vanguard Capital Markets Model® forecasts. This ensures that the recommended active allocation aligns with the participant's risk profile while maintaining strategic asset allocation.
Our active capability goes beyond simply offering active fund options. We aim to deliver active-passive portfolios tailored to participants’ tolerance for active risk that increase the likelihood of outperformance relative to fund benchmarks and help give them the best chance for retirement success.
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. Diversification does not ensure a profit or protect against a loss.
- 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.
- Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.