Vanguard Strikes Back With Lower Target-Date Fees

Vanguard, a longtime leader in low-cost investing, today announced it will roll out a new institutional offering for its Target Retirement fund lineup. With an estimated expense ratio of just 0.10%, the new funds will be the lowest-priced target-date mutual funds available. The move undercuts Fidelity, which currently offers the industry's lowest-priced series, Fidelity Freedom Index. Fidelity has room to fight back, as it is using a waiver to keep fees for that series at 0.16% and its underlying funds cost just 0.09% to 0.11%. Vanguard's new series will also be competitive with, and sometimes cheaper than, other index-based target-date funds offered via collective investment trusts, such as BlackRock’s LifePath Index CIT series. Vanguard also offers less expensive target-date CITs.

Vanguard's new offerings, directed at retirement-plan providers, will require a $100 million minimum initial investment for investment-only clients, though recordkeeping clients will have no minimum requirement. Vanguard's current retail-focused funds charge between 0.16% and 0.18% and require an individual contribution minimum of $1,000. The firm's retail series passes along just the cost of its underlying index funds, but by using Investor share classes rather than the less expensive Admiral or Institutional share classes, there was room for the series to shave expenses. The new series will invest in a mix of those three share classes, which suggests that Vanguard should still have room to lower costs in the future. The announcement of the new institutional series is welcome news for plan sponsors.

In addition to creating a new, lower-cost series, Vanguard will be making a change to the strategic allocation of its multiasset lineup. By the end of 2015, the funds will boost their international-stock stake to 40% of stocks from 30%, and they will increase their international-bond exposure to 30% of the bond sleeve from 20%. The firm doesn't tweak its exposures often, although since the 2003 launch of its Target Retirement funds, Vanguard has steadily moved to increase the series' international exposure. In 2010, the series increased its international-stock exposure to 30% from 20%, and in 2013, the series added international bonds to the mix. Many industry peers have also increased their international exposure over time, although Vanguard's recently announced changes give the firm's offering a decidedly more international tilt than the norm, with the typical target-date fund having one third of its stock sleeve and roughly 16% of its bond sleeve invested abroad.