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Vanguard Merging Retirement Funds, Cutting Fees, Adding a New Option

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What You Need to Know

  • The changes could lower costs for target date fund investors by $190 million, Vanguard says.
  • Vanguard is merging its Institutional Target Retirement Funds into Vanguard Target Retirement Funds.
  • It's also lowering the minimum for the Vanguard Target Trust II program from $250 million to $100 million.

Vanguard is making several changes to its target retirement funds that are expected to lower costs by an estimated $190 million and enhance accessibility and choice.

The mega asset manager is merging Vanguard Institutional Target Retirement Funds into Vanguard Target Retirement Funds, which will standardize and lower the expense ratios for each fund to 0.08% once the merger is completed, which is expected in February 2022.

The average expense ratio of Vanguard Target Retirement Funds is currently 0.12% while the average expense ratio for Vanguard Institutional Target Retirement Funds is 0.09%, according to a Vanguard spokeswoman.

Completion of the merger will also provide portfolio management and operational efficiencies as well as economies of scale, which could result in additional cost savings over time, according to Vanguard.

“Our unique client-owned structure allows us to share our success with clients through lower fees,” said Vanguard Chairman and CEO Tim Buckley, in a statement.

In addition to the retirement funds’ merger, Vanguard is lowering the minimum investment for the Vanguard Target Trust II program from $250 million to $100 million, allowing more plan sponsors and employees to access lower-cost target date options. It is also launching a new retirement income solution for each Target Retirement Trust program designed for investors in retirement.

The new Vanguard Target Retirement Income and Growth Trust has a 50% equity allocation, which can help participants who, because of their wealth, risk tolerance and/or additional sources of income, maintain higher discretionary spending in retirement, according to Vanguard.

The new trust is designed to be an opt-in alternative to the 30% equity allocation of the Vanguard Target Retirement Income Trust. As trust participants approach age 65, they will be provided tools and guidance to determine which trust option best fits their needs.

Taken together, these changes to Vanguard Target Retirement Funds can help more participants remain in their 401(k) plan upon retirement and continue to benefit from its institutional pricing and fiduciary oversight.

“Our new retirement income offer underscores our deep partnership with sponsors, who are increasingly seeking additional tools to guide their participants’ financial well-being into and beyond retirement,” said John James, managing director and head of the Vanguard Institutional Investor Group, in a statement.