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As we mark the 20th anniversary of the Vanguard Target Retirement Funds’ inception, our overarching goal has remained constant: to help provide investors with a world-class target-date fund (TDF) solution that is low cost, straightforward, highly diversified, and durable. Over the past decade, TDFs have become a cornerstone of U.S. retirement plans, and the percentage of investors using these funds in the defined contribution (DC) space continues to grow.1 The increased availability of TDFs, combined with managed account advice within retirement plans, demonstrates how plan sponsors have prioritized helping investors take a more comprehensive approach to financial well-being. While the increasing popularity of these funds is more understood today, that wasn’t always the case. In this article, we’ll look at the history of TDFs, their impact on the retirement landscape, and how, together with our plan sponsors, we’ve meaningfully improved retirement outcomes for our investors.
We’re extremely proud that Vanguard Target Retirement Funds are trusted by more plans and participants than any other TDF provider, with more than $1 trillion in assets under management representing more than 15 million investors.2 Because saving for retirement is one of the most important financial goals for many Americans—if not the most important—we’re committed to providing the best retirement products and solutions as we continually strive to return value to our investors.
Figure 1. Vanguard’s share of all TDF assets
Have TDFs earned their keep?
TDFs have become the primary choice for a DC plan’s qualified default investment alternative (QDIA) since the passage of the Pension Protection Act of 2006 (PPA). The percentage of plans using a TDF as their default fund grew from 71% in 2013 to 90% in 2022.1 TDFs now account for 40% of all plan assets (compared with only 19% in 2013), and 63% of all contributions were directed to TDFs (compared with 34% in 2013).1 Additionally, the space continues to grow regardless of the market environment. For example, despite the market volatility of 2022, TDFs saw more than $153 billion in new net cash flow.3 These statistics make it hard to deny that TDFs have already left their mark on the retirement savings landscape. But their ubiquity raises an important question: Have they delivered for investors?
From the start, TDFs were designed to simplify the investment process and appeal to investors who felt overwhelmed by the task of funding their own retirement. These were individuals who, prior to the PPA, assumed all responsibility (and risk) for managing the assets within their DC plans—despite having little to no knowledge about investing. In addition, the retirement savings strategies at that time did not account for the fact that many people live years beyond retirement and could potentially face the risk of running out of money later. There was a substantial need to combine the benefits of broad diversification across asset classes with professional management that was based on solid investment practices. TDFs helped fill that void.
The role of TDFs is to help deliver reasonable returns for investors without subjecting them to undue risk relative to the broad financial markets. Consequently, one of the primary challenges many retirement savers face is constructing a portfolio with the appropriate mix of higher- and lower-risk assets that matches the investor’s time horizon, retirement goals, and other considerations. Because retirement savings decisions are so important for so many people, designing a glide path that represents age-appropriate levels of risk is a primary goal. Once the individual invests or is defaulted into a TDF, the fund’s portfolio manager oversees all decisions about portfolio construction and ongoing rebalancing. As a testament to the increasing value that TDFs bring to retirement portfolios, investors turned to professionally managed allocations in record numbers in 2022, according to Vanguard research.
Figure 2. Trend in asset allocation by participant age; average equity allocation participant weighted
Figure 3. Consistent risk-return balance
Distribution of five-year total returns by strategy, 2022: Vanguard defined contribution plans. Based on 828,000 observations for single target-date fund investors, 20,000 for balanced fund investors, 77,000 for managed account investors, and 1.3 million for all other participants. Past performance is no guarantee of future returns.
Source: Vanguard, 2023.
The heart of our TDF design: The end investor
At Vanguard, the end investor has always been at the heart of our TDF design. We believe the most successful investors are those who have a retirement portfolio that reflects their own circumstances and risk tolerances. We started by asking how we could best help investors save enough for retirement while ensuring that they could keep more of their hard-earned money by continually lowering the cost of investing over time. Based on Vanguard research, retirement account balances among TDF users have steadily increased over the last 10 years.1
We’ve always taken a proactive approach to navigating the complexities that result from the ongoing evolution of retirement programs. We supported regulators as they made decisions related to the PPA and target-date adoption within QDIAs. When many plan sponsors were shifting from defined benefit to DC plans, we were there to communicate those complex scenarios: advocating for automatic solutions, such as default enrollment, automatic savings features, and the introduction of managed account advisory services to help reduce fiduciary concerns. Rather than trying to change the investor's behavior, we focused on partnering with plan sponsors to enhance retirement plan design.
Figure 4. Index-based TDF market share and Vanguard’s TDF expense ratio over time
Aligned interests for continued success
1 How America Saves 2023, Vanguard.
2 DC assets are based on AUM in both Vanguard-administered plans and those administered by others. Other figures are based on AUM market share of the TDF industry. Sources: Vanguard and Morningstar, Inc., as of December 31, 2022.
3 Target-Date Strategy Landscape: 2023 report, Morningstar, Inc., as of March 28, 2023.
4 Highlighting the value of managed portfolios. Vanguard, September 2023.
5 Morningstar analysis, as of March 2023.
For more information about Vanguard funds, visit vanguard.com or call 800-662-2739 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
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.
All investing is subject to risk, including the possible loss of the money you invest. 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.
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.