Vanguard Turns Up the Heat in New Target-Date Series

If Emeril Lagasse cooked up a target-date strategy, you can bet he’d add a little spice, along with his trademark, “Bam!”

Fortunately, retirement-savings products are not designed by famous chefs. Still, the folks at Vanguard are preparing a forthcoming target-date series with a decidedly higher heat profile than what’s currently on its menu. Yesterday, the company announced its Vanguard Target Retirement Growth Trusts, which operate similarly to its existing collective investment trusts, just with a higher equity allocation through the glide path. Whereas the current products start with a 90% equity allocation that gets lowered to 30% at the target date (designed to be age 72), the new iteration would start at 95% and gradually take it down to 50%, remaining at that level for as long as someone is in the strategy. 

That all means more risk, of course, which is intentional. “They’re designed for plans whose participants may benefit from taking on more equity risk over time, such as higher-income workers with access to other retirement income sources like pensions, or populations with strong savings habits and a greater capacity to handle market volatility,” said Brian Miller, Vanguard’s head of multiasset product management, in a statement. “Plan sponsors can choose between Vanguard’s target-date offerings based on the needs of their workforce, and Vanguard provides research and consultation to help inform that decision.”

A Game of Risk

Target-date products, the dominant investment defaults in 401(k)s, were scrutinized in the wake of the 2008 financial crisis. Near retirees and people in retirement suffered investment losses because of the equity allocations in the products. Since that time, target dates’ popularity has grown enormously, and the products have assumed higher levels of risk: 

• It’s common for asset managers to set initial equity allocations above 90%, whereas the median level was less than that in 2015, per Morningstar’s latest Target Date Landscape report. 
• And risk levels are higher at the target dates as well, in part because low interest rates pushed down bond returns and because life expectancy has increased, meaning that people need to make their investment work harder, according to the report.

“At 65, a retiree is likely to need to finance consumption for another 25-30 years, and potentially even longer,” said Olivia Mitchell, executive director of The Wharton School’s Pension Research Council. “This exposes the participant to longevity and inflation risks, which an ultraconservative portfolio can make worse.” The 50% target-date equity allocation Vanguard is using isn’t necessarily excessive, especially if one considers the household assets retirement savers have outside of their 401(k)s, she noted. Still, the prospect of a major market decline for people in or near retirement is concerning, even if that risk doesn’t imply that they should only own bonds in their portfolios, she said.

But Also, Some Insurance. Late last year, Vanguard paraded a different target-date trust product — one that paired its strategies with a lifetime income annuity from TIAA. That product, the Target Retirement Lifetime Income Trusts, could end up launching around the same time as the newly announced Target Retirement Growth Trusts, said Jeff DeMaso, editor of The Independent Vanguard Adviser.

More choice could benefit retirement investors, Mitchell said. “Vanguard’s announcement highlights an important issue with target date funds: Age alone is an imperfect basis for determining one’s equity share,” she said. “Retirees of the same age can differ in terms of their risk preferences, savings, pension accumulations, Social Security benefits and ability to withstand loss.”

Now, does anyone wonder what a target-date series designed by Guy Fieri might look like?