Has Vanguard’s Target-Date Fund Series Lost Its Edge?

Megan Pacholok: Has Vanguard’s target-date fund lost its edge? I’m Megan Pacholok, a senior analyst on Morningstar’s manager research team. Joining me today to answer that question and highlight some of Morningstar’s top target-date picks is Jason Kephart, director of multi-asset ratings.

Hello, Jason.

Jason Kephart: Hi, Megan. Thanks so much for having me.

Pacholok: Let’s get right into it. Vanguard’s target-date strategy is the largest in the industry. It holds over $1 trillion across its mutual fund and collective investment trusts and makes up about 38% of the total target-date assets. And it’s really not showing any signs of slowing down. In 2022, it gathered the most net new money and that marked the ninth out of last 10 years that it was able to do so. Jason, why is Vanguard’s target-date fund so popular?

Kephart: That’s a great question, Megan. Vanguard’s target-date series is really popular for a lot of the same reasons Vanguard is. It offers a no-frills approach to saving for retirement. It’s broadly diversified across global equities and bonds, and it’s offered at a very cheap price. Its mutual funds only cost 8 basis points, and its CITs are even cheaper. That’s a really hard option for investors and plan sponsors to pass up. We’ve seen a number of excessive-fee lawsuits targeting 401(k) plans. So, in that sense, Vanguard is a very safe option, and it’s also proven to be pretty reliable over the last decade.

Pacholok: So, it’s a safe option. But is it the best option?

Kephart: It has a Morningstar Analyst Rating of Silver. So, we think it’s a very good option. But we do have a couple of series that we think have a little bit of an advantage that are rated Gold. You mentioned earlier has Vanguard lost its edge? I won’t say it’s lost its edge, but it’s not as sharp as it used to be. If we look back a decade ago, it had a really huge advantage in fees. But over time, as more target-date funds have gotten more competitive in cost, that fee advantage isn’t what it used to be. Now, there are also a number of series that charge just as much as Vanguard and have been a little bit more proactive in terms of making changes we think are going to benefit shareholders in the future.

Pacholok: Jason, you alluded to other target-date strategies having an edge over Vanguard. Let’s name names.

Kephart: BlackRock LifePath Index. It’s the only target-date fund that’s all index-based that we recommend with a Gold rating. What we really like about this series is, one, it’s cheap. Its cheapest share classes are about the same cost as Vanguard’s. But we think the management team has been just a little bit more proactive in terms of making changes. BlackRock’s team was one of the first in the industry to move to nearly all equity in the beginning of its glide path, and we think that makes a lot of sense. If you’re betting on stocks outperforming bonds over 15 or 20 years, that’s a pretty safe bet. And what we’ve seen in terms of investor behavior is that those target-date investors furthest from retirement tend to be able to ride out market volatility a lot better than those closer to retirement. So, we’re not really worried about people making bad decisions based on market volatility when it’s just a little bit more volatile. So, we think that’s a really good option for investors.

Pacholok: That’s really interesting, Jason. So, both Vanguard and BlackRock LifePath Index use passive funds as their underlying exposures. For investors that prefer active funds as that underlying exposure, what does Morningstar recommend?

Kephart: We have a couple of series we really like that are all actively managed at the underlying level. American Funds Target Date Retirement and T. Rowe Price Target Retirement are both rated Gold. Both of these firms are really well-known for their really good actively managed equities. In American Funds, I think their bond funds kind of fly under the radar sometimes. They’re really good at being bond funds when there’s equity market volatility. So, we really like that kind of portfolio construction they’ve got going on there. And Capital Group has also put a lot more resources in their multi-asset team over the last couple of years. So, we’re pretty confident it’s going to continue to be a really good option going forward.

At T. Rowe Price, I don’t think their fixed-income funds are as impressive. But their multi-asset team is exceptional. It’s like finding a great chef. You don’t necessarily have to have all the best ingredients to make a best meal. But obviously, we know that all active or all passive, that’s not the only choice investors have when it comes to choosing a target-date fund. Megan, you cover a couple of series that blend both active and passive together. What do you like about those?

Pacholok: That’s right, Jason. These blend target-date strategies are really showing you that investors don’t have to select an all-active or an all-passive option. And in some cases, we have seen target-date managers really efficiently navigate between those two, choosing a passive fund in more efficient markets that helps them keep costs lower for the overall series and sticking with and holding on to those active managers that they have a lot of high conviction in and can really provide an edge over the long run. So, in this case, with the blend target-date strategies, investors are really getting the best of both worlds.

Kephart: Which series are your favorite?

Pacholok: Well, Morningstar analysts cover a number of blend strategies, and we rate two of them Gold: T. Rowe Price Retirement Blend and Pimco RealPath Blend.

Kephart: Those are both great options.

Pacholok: Jason, thank you for joining me today to highlight Morningstar’s top target-date picks.

Kephart: Thanks for having me.

Pacholok: From Morningstar, I’m Megan Pacholok helping you stay on target.