Report : Investment | November 02, 2022

How Vanguard designs its TDFs to help a range of investors

Read time: 5 minutes

Originally published 9/26/2022 
Updated 8/16/2024

Vanguard, the largest target-date fund (TDF) provider,* has updated its foundational TDF research paper and takes a fresh look at the methodology behind its TDF glide path. Vanguard’s Approach to Target-Date Funds applies our life-cycle theory to real-world situations and makes the case for how its glide path is constructed. Knowing that TDFs serve a broad range of investors seeking a financially secure retirement, the authors explain how our glide path is regularly evaluated to ensure that investors have a high likelihood of meeting their retirement income needs. They further stress-test the inputs leading to our glide path construction, such as the age at which the investor chooses to retire, their income needs, risk preferences, and pension benefits, to examine the sufficiency of our investor assumptions.

Vanguard’s life-cycle investing framework

The key to helping investors achieve retirement readiness is first having a solid framework to determine the appropriate level of risk for each phase of an investor’s life cycle and then building a well-diversified portfolio to appropriately meet those respective risk levels. Most investors have multiple goals throughout their lifetime, and the Vanguard Life-Cycle Investing Model (VLCM) factors in each complex, interconnected decision about saving, spending, and asset allocation. While made up of multiple inputs, our framework focuses on investor retirement outcomes and aims to strike a balance between two primary objectives of investment portfolios: growth to provide wealth to meet retirement spending needs and stability to provide comfort in volatile markets, particularly for those near or in retirement (Figure 1).

Figure 1. A systematic framework for validating TDF glide paths

Applying our life-cycle theory to real-world situations

Leveraging the VLCM, the authors use the glide-path results representing different lifestyle personas in retirement to evaluate its sufficiency in supporting the income needs associated with each persona. One of the highlights of the research is a deeper examination of three distinct retirement goals:

The paper seeks to validate what a growing number of target-date investors already seem to know: Vanguard TDFs are a sensible choice for most retirement income needs. In designing a glide path that supports investors’ needs and aligning it with their retirement age, risk tolerance, and other characteristics, our glide-path approach is most aligned with helping ensure clients have the savings necessary to maintain their lifestyle through retirement.

The paper further stress-tests Vanguard TDFs for varying retirement ages, spending habits, and income levels and, again, finds that for many investors across a wide range of characteristics, the Vanguard TDF is still a great option to help investors meet their retirement goals. Vanguard’s approach to building TDFs rests on a solid foundation of theory and real-world experience that ensures that the wide range of investors who count on TDFs to secure their retirement have an investment solution well positioned to meet their needs.

*Based on AUM market share of the TDF industry. Sources: Vanguard and Morningstar, Inc., as of June 30, 2024.
Authors Ankul Daga, Nathan Zahm, Victor Zhu, Bryan Hassett, Greg Banis, and Roger Aliaga-Díaz describe how Vanguard approaches the challenge of meeting the needs of a wide range of investors. Their research provides reassurance that Vanguard TDFs are a compelling solution to meet the retirement needs of plan participants and convey a sense of fiduciary well-being for plan sponsors.
Download the white paper

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 work force. 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.