Despite these distractions, retirement plan fiduciaries have an obligation to remain focused on the long term. That requires due diligence in monitoring TDF performance and sufficiency, which is not necessarily as straightforward a task as some might imagine.
There are different metrics we believe are needed to adequately gauge whether a TDF is achieving its mandate for retirement investors. There are also challenges associated with analyzing and comparing the TDF series, specifically the presence of multiple vintages, each with its own asset allocation, and the different approaches that each TDF provider uses for everything from glide-path construction and sub-asset allocation to benchmark implementation and rebalancing.
In this article, we build upon the discussion of TDF assessment metrics by layering in another critical element: the most appropriate time frames over which to gauge TDF sufficiency. After all, TDFs that dazzle in one year but lag in another risk not capitalizing on the benefits of consistency.
What's more, short-term performance benchmarking doesn't help TDF investors answer the most important questions:
- What long-term return does an investor need to earn to accumulate enough money for retirement?
- Does the investment provider expect its mix of embedded asset allocation guidance and fund selections to meet this return threshold?
- Is the fund meeting these expectations?
- What risks are implied by these expectations?
Answering these questions in detail is beyond the scope of this article. However, our research continues to affirm that relative long-term consistency, not short-term sprints, can lead to better retirement readiness outcomes for TDF investors.
An appropriate time frame for performance measurement
In our digitized world, we're conditioned to consume bite-size chunks of information that focus on one-year, quarterly, or even daily fund performance figures. While understanding the drivers of short-term performance ensures a TDF is performing as expected based on the underlying asset allocation, we think it's critical not to over-anchor to short-term performance.
The short-term performance race is often decided by how aggressive the glide path is relative to peers. But the TDF with a higher allocation to stocks, one that leads the pack when stocks are rising, is vulnerable to underperforming in a stock market downturn.
The value of consistency
As our clients know well, Vanguard has always concentrated on the long-distance run, not the sprint. Given the potential multidecade investment horizon and the mandate of a TDF to help investors achieve retirement readiness, we place a high value on the consistency of results, not on a race to “break the tape” in any given year.
Just as professional marathoners know the importance of not running too fast too early, we don't want our Target Retirement Funds to be racing to the lead in a quarter or year only to later fall back to the rear. We think investors are best served when TDFs seek to avoid extremes in their returns and instead focus on consistency. Their role as qualified default investment alternatives requires a careful approach.
Figure 1. Vanguard Target Retirement 2025 Fund's track record
Sources: Vanguard and Morningstar, as of December 31, 2022.
Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at vanguard.com/performance. There may be other material differences between products that must be considered before investing.
Figure 2. A history of consistently strong risk-adjusted performance
Sources: Vanguard and Morningstar, Inc., as of December 31, 2022. Vanguard Investor Shares highlighted.
To expand on this idea, Figure 2 presents another perspective on the benefit of Vanguard's risk-controlled approach. The graph shows relative performance over 3-, 5-, and 10-year periods, with risk measured on the horizontal axis and annualized returns on the vertical axis. We focus on the risk-adjusted returns because it's important to be rewarded over time for the age-appropriate risk level of a portfolio. Risk-adjusted returns are also the most useful measure for comparing funds because they tell you whether a particular fund is taking on unnecessary risk to generate a higher total return.
Note that Figure 2's red dots represent Vanguard vintages, while the other scattered dots represent the rest of the TDF peer group. While the performance of other TDFs varies from above average to below average along the time axis, the performance of Vanguard Target Retirement Funds remains in the upper echelon.
Three vintages in our Target Retirement Fund suite—the Target Retirement Income, 2025, and 2050 funds—represent a useful cross-section to examine, as they show key points along the glide path. Each fund has a track record of 15 years or longer, and each fund ranked in the top quartile of its average performance rankings against its Morningstar peer group for 10-year rolling periods from near their inception to the end of 2022. Averaging out their rankings over those rolling periods, each fund outperformed its peer-group average 100% of the time.1
Short-term consistency, long-term outperformance
In short, the runner training for a marathon needs to know how to keep a sustainable pace to reach the goal in the targeted time frame. Outperforming a peer group most of the time in the short run while staying within a prudent target asset allocation raises the chance of notable outperformance in the long term.
Our Target Retirement Fund series launched in 2003, making them among the earliest TDFs to be index based. They've navigated many different market environments—good, bad, and everything in between—and through it all, year in and year out, our fund suite has provided a consistent experience for our investors. This kind of long-term performance track record can provide plan sponsors with the confidence that Vanguard Target Retirement Funds remain a proven way to position participants for retirement readiness and financial well-being.
- For more information about Vanguard funds, visit vanguard.com or call 800-523-1036 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.
- 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.
- 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 the Target Retirement Fund is not guaranteed at any time, including on or after the target date.