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Vanguard to merge Target Date Retirement fund share classes for $190 million in cost savings

Erin Arvedlund, The Philadelphia Inquirer on

Published in Home and Consumer News

Fund giant Vanguard this week said it will merge more than $660 billion of its Target Date Retirement funds, which are ubiquitous and popular in 401(k) plans.

Chairman Mortimer "Tim" Buckley said Vanguard will save investors $190 million in fees, or about 0.03% of assets, with the move. Vanguard currently manages $8.3 trillion in investor money across all its funds.

Some criticized the consolidation, saying that "Vanguard could have saved investors money years ago" with the same consolidation of share classes, said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter, which tracks the performance of Vanguard funds. "I'm all for saving investors money, but Vanguard had the ability to do so many, many years ago and they didn't."

But other experts said target date funds across the industry have helped Americans invest in the stock and bond markets at lower costs. Today, both Target Date 2030 funds hold about $59 billion in institutional shares and $39 billion of investor shares in total assets.

"The argument about 'why not sooner?' is splitting hairs," said Michael Finke, a professor of wealth management at American College of Financial Services in King of Prussia.

"Compared to the year 2000, the quality of investment portfolios is far higher and costs far lower" overall, Finke said.


Vanguard's average expense ratio for target date funds is 0.12%, while the industry average expense ratio for comparable target-date funds is 0.55%, he said, citing Investment Company Institute data.

"We are in a much better place today than before target date funds. Workplace retirement plan sponsors have an incentive to offer low-cost target date funds. They might get sued if costs are too high," he added. "Investors are comparatively getting an amazing deal with target date funds."

Take Vanguard's Target Retirement 2030 fund. The institutional class of shares charges a 0.09% expense ratio, because within the fund, Vanguard uses lower-cost share classes in the portfolio. Vanguard's Total Stock Market Index Fund Institutional shares, for example, cost 0.03%.

The mom-and-pop version — investor shares — of Target Retirement 2030 cost 0.14%. Many of the underlying share classes are also the more expensive investor shares. The Total Stock Market Index Fund investors shares, which the fund holds, also cost 0.14%.


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