Target date funds ... so much for "set and forget" [and WSJ article]

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Ed 2
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Ed 2 »

livesoft wrote: Wed Jan 26, 2022 6:02 am OK, watched the video. In all our taxable accounts, we have one single Vanguard mutual fund and it is not Total US Stock Market Index nor Total International Stock Market Index and it also has an ETF share class. I remain totally unconcerned.

Maybe there will be a stampede to convert to the ETF share class of many Vanguard index funds. This means that folks will have to abandon the legacy mutual fund platform at Vanguard which can be considered a benefit.
I really don’t like to force my hands into Vanguard brokerage to convert to ETF’s. Just thinking. Thank you livesoft, I really hope that you are right on this one. But real risk remains. Unless Vanguard officially denounce the rumors.
Last edited by Ed 2 on Wed Jan 26, 2022 6:09 am, edited 2 times in total.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by mmcmonster »

livesoft wrote: Wed Jan 26, 2022 6:02 amMaybe there will be a stampede to convert to the ETF share class of many Vanguard index funds. This means that folks will have to abandon the legacy mutual fund platform at Vanguard which can be considered a benefit.
Hopefully Vanguard will institute ETF fractional share purchases prior to doing this. Being able to buy in dollar amounts rather than whole number of shares is the only reason I buy Vanguard mutual funds rather than ETFs.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by jebmke »

livesoft wrote: Wed Jan 26, 2022 5:39 am Since you asked, I think you are reacting impetuously. There are reasons to ditch Vanguard, but this is not one of them for folks who do not have Target Date funds in a taxable account.

Full disclosure: We have less than 20% of our assets held at Vanguard and are not adding to them.
For many investors, balanced funds in taxable is not a good idea and never will be.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by jebmke »

livesoft wrote: Wed Jan 26, 2022 6:02 am OK, watched the video. In all our taxable accounts, we have one single Vanguard mutual fund and it is not Total US Stock Market Index nor Total International Stock Market Index and it also has an ETF share class. I remain totally unconcerned.

Maybe there will be a stampede to convert to the ETF share class of many Vanguard index funds. This means that folks will have to abandon the legacy mutual fund platform at Vanguard which can be considered a benefit.
And most will learn that the difference between MF and brokerage account is trivial.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by livesoft »

Vanguard should create an online tool, maybe called Vangle which allows an investor to keep their mind sharp. The player would put in the amount of money they want to invest and a first ETF ticker symbol of what they mainly wanted to invest in. Then they would guess other ticker symbols to buy or additional dollar amounts needed to buy a whole share and leave no leftover cash.

That is, buying mutual fund shares in whole dollar amounts dulls one brain. Vanguard wants to create sharper investors.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by TomatoTomahto »

jebmke wrote: Wed Jan 26, 2022 6:11 am
livesoft wrote: Wed Jan 26, 2022 5:39 am Since you asked, I think you are reacting impetuously. There are reasons to ditch Vanguard, but this is not one of them for folks who do not have Target Date funds in a taxable account.

Full disclosure: We have less than 20% of our assets held at Vanguard and are not adding to them.
For many investors, balanced funds in taxable is not a good idea and never will be.
I don’t have any myself, but had recommended Target Date MFs to some people who were in extreme need of a “set it and forget it solution.” Based on history, I felt that the TD funds were good enough, although I did mention to them that it would be better to have the constituent parts of the TD funds separate. I feel bad about the recommendation I gave them.

I will consider converting my MFs to ETFs, as I already have brokerage accounts.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Tubes »

livesoft wrote: Wed Jan 26, 2022 6:14 am Vanguard should create an online tool, maybe called Vangle which allows an investor to keep their mind sharp. The player would put in the amount of money they want to invest and a first ETF ticker symbol of what they mainly wanted to invest in. Then they would guess other ticker symbols to buy or additional dollar amounts needed to buy a whole share and leave no leftover cash.

That is, buying mutual fund shares in whole dollar amounts dulls one brain. Vanguard wants to create sharper investors.
I tried Vangle today and I think the MF to ETF link is playing with my mind! It took me 6 tries. Time to go to Fido. 8-)

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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by livesoft »

Tubes wrote: Wed Jan 26, 2022 6:20 amI tried Vangle today and I think the MF to ETF link is playing with my mind! It took me 6 tries. Time to go to Fido. 8-)
LOL! :thumbsup :thumbsup
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by sleepysurf »

FYI, just saw this news blurb "Massachusetts Attorney General investigating sales of target date funds to retail investors after word of surprise tax bills" ... https://www.financial-planning.com/news ... -tax-bills

I fully expect some new regulations/legislation will be the result, but doubt Vanguard has any real liability, as the article correctly points out that the alternatives could have been worse...
Looking at it from the investor’s point of view, Jason Kephart, a strategist at Morningstar, said even with more disclosure about potential tax implications from such a change, would investors have acted differently?

“What are your options?” he asked. “If you sold out, you would have to pay tax on the overall gains in the account. Vanguard could probably have been more proactive here, but the alternative is selling out of your position and triggering a higher capital gains bill.”
Perhaps Vanguard, and others, will eventually create ETF share classes for their Target Date (and Life Strategy type) funds.

BTW, after watching Rob Berger's video, I'm seriously considering converting all my Vanguard mutual funds in Taxable to their ETF share class.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by livesoft »

sleepysurf wrote: Wed Jan 26, 2022 6:25 am Perhaps Vanguard, and others, will eventually create ETF share classes for their Target Date (and Life Strategy type) funds.
Another implementation could be that Vanguard Target Retirement and LifeStrategy funds do NOT own any underlying mutual funds, but they would own the corresponding ETFs instead. That is, a fund of ETFs, or a set of ETFs in a mutual fund wrapper.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Ed 2 »

My whole point was that not only target date funds can have same fate after this. I don’t have brokerage. All my investments in legacy Vanguard mutual funds accounts since 1999. If you look at fine print you may see that every fund can distribute short and long term gains , Index or not.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by winterfan »

I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by jebmke »

That is exactly why it is important to read the prospectus for every fund before you first invest. Many don't bother. As for the earlier post regarding MA, I doubt VG will even bother to roll their eyes on that. They have had lawyers involved in developing prospectuses for decades. They'd be better off spending their time looking at SPACs.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by LadyGeek »

I merged briang_g's thread into the ongoing discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion).
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Grt2bOutdoors »

winterfan wrote: Wed Jan 26, 2022 6:46 am I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
The institutions sold out of the higher expense ratio funds to move into the lower cost institutional level funds. That stampede led to a mass liquidation of shares and thus distributions of capital gains on a pro rata share across all shareholders.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by winterfan »

Grt2bOutdoors wrote: Wed Jan 26, 2022 6:54 am
winterfan wrote: Wed Jan 26, 2022 6:46 am I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
The institutions sold out of the higher expense ratio funds to move into the lower cost institutional level funds. That stampede led to a mass liquidation of shares and thus distributions of capital gains on a pro rata share across all shareholders.
That makes sense. Thanks!
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by LadyGeek »

I merged Ed 2's thread into a similar discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion).
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

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Tubes wrote: Wed Jan 26, 2022 6:20 am
livesoft wrote: Wed Jan 26, 2022 6:14 am Vanguard should create an online tool, maybe called Vangle which allows an investor to keep their mind sharp. The player would put in the amount of money they want to invest and a first ETF ticker symbol of what they mainly wanted to invest in. Then they would guess other ticker symbols to buy or additional dollar amounts needed to buy a whole share and leave no leftover cash.

That is, buying mutual fund shares in whole dollar amounts dulls one brain. Vanguard wants to create sharper investors.
I tried Vangle today and I think the MF to ETF link is playing with my mind! It took me 6 tries. Time to go to Fido. 8-)

Vangle 1 6/6

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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Ed 2 »

LadyGeek wrote: Wed Jan 26, 2022 7:08 am I merged Ed 2's thread into a similar discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion).
Ok. Thanks. For a moment I started looking what did I do wrong;)
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by LadyGeek »

^^^ No problem. It's a popular question right now. :wink:
sleepysurf wrote: Wed Jan 26, 2022 6:25 am ...Perhaps Vanguard, and others, will eventually create ETF share classes for their Target Date (and Life Strategy type) funds.

BTW, after watching Rob Berger's video, I'm seriously considering converting all my Vanguard mutual funds in Taxable to their ETF share class.
I converted all my Vanguard mutual funds to ETF share classes before I moved them to Fidelity.

You'll need to call them. It can't be done online. At the bot prompt, say "trade" and answer the question "Yes" (I forget what they ask) to get to the right person. It needs to be done by someone authorized to make transactions on your behalf - not by a generic customer support person.

Also, don't do this when the fund is throwing dividends. If this is happening, they'll delay the conversion for a few days until the distributions have settled.

The conversion won't show up as a Quicken transaction. They only show in the Vanguard transaction history - you'll have to manually add / remove shares.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Wiggums »

Ed 2 wrote: Wed Jan 26, 2022 5:46 am
livesoft wrote: Wed Jan 26, 2022 5:43 am
Ed 2 wrote: Wed Jan 26, 2022 5:41 amInstitutional International Index funds open account limits I think over 1 billion dollar’s . What will happen if they decide to lower the limit for institutional investor like they done to age based?
Are there not ALREADY institutional share classes of the funds you mentioned? If they lowered the limit of those funds, then how would it affect the Admiral share class? Do you think you would stampede out of Admiral and cause the problem?
I honestly don’t know. But you may look at Rob Berger video on YouTube and he explains it very well what happened and what may happen to other funds.

https://m.youtube.com/watch?v=CxAEi42U3gU
I watched the video and I don’t know what caused the large distributions. I wouldn’t make portfolio changes based on this video. There is no perfect portfolio and the brokerage business will continue to change. In taxable, it is more difficult to make fund changes. Even Vanguard says that a target date fund in taxable is not recommended. ETFs are not perfect. Even when a broker supports fractional shares, the backup process is more complex. How does one schedule purchases?

The Vanguard fee model is different than other brokers. Is the race to the bottom (on fees) hurting Vanguard? Schwab has cash as part of their funds which contributes to their bottom line. It seems like Vanguard is responding to competition with their acquisition, consolidating funds, changes fees and minimums.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by Ed 2 »

LadyGeek wrote: Wed Jan 26, 2022 7:18 am ^^^ No problem. It's a popular question right now. :wink:
sleepysurf wrote: Wed Jan 26, 2022 6:25 am ...Perhaps Vanguard, and others, will eventually create ETF share classes for their Target Date (and Life Strategy type) funds.

BTW, after watching Rob Berger's video, I'm seriously considering converting all my Vanguard mutual funds in Taxable to their ETF share class.
I converted all my Vanguard mutual funds to ETF share classes before I moved them to Fidelity.

You'll need to call them. It can't be done online. At the bot prompt, say "trade" and answer the question "Yes" (I forget what they ask) to get to the right person. It needs to be done by someone authorized to make transactions on your behalf - not by a generic customer support person.

Also, don't do this when the fund is throwing dividends. If this is happening, they'll delay the conversion for a few days until the distributions have settled.

The conversion won't show up as a Quicken transaction. They only show in the Vanguard transaction history - you'll have to manually add / remove shares.
Thank you. That’s what I am going to do this year. Vanguard lost a huge small investors advocate -Jack Bogle, unfortunately . I moved already half of my assets into Fidelity. I didn’t expect I will start questioning my own long term strategy at Vanguard taxable accounts.
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Re: Rob Berger says vanguard threw me under a bus !

Post by sycamore »

Cubicle wrote: Wed Jan 26, 2022 12:28 am Mutual funds (at Vanguard, at least until until their patent expires (2023 I think)) which have an ETF share class will not have this problem.
Not to nitpick, but the meaning of the above isn't clear. The patent expiration itself won't have any effect on the Vanguard funds; Vanguard will continue to offer funds with both mutual fund and ETF share class. Maybe other fund families will apply the process [described in the patent] to their own funds. That would be some welcome competition.
Cubicle wrote: Wed Jan 26, 2022 12:28 am Vanguard mutual funds without an ETF share class are vulnerable.

Other company's mutual funds are also vulnerable.
Also note that balanced/all-in-one ETFs are also "vulnerable." iShares Core allocation ETFs once paid out capital gains due to rebalancing (related to reduction of number of funds held by the ETFs). I put vulnerable in air quotes because I think it's rather unlikely to happen again, but it's good to know the possibility remains.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Ferdinand2014 »

I have had Fidelity for 22 years. Throughout this time, I have had the Fidelity 500 index fund. It has gone through various iterations over the years with various share classes and cost structures. It merged several years ago into the institutional fund with 0 minimum investment, 0 minimum balance and the same cost as the institutional class at 1.5 basis points. Even the ticker symbol changed to the institutional version. However, I never incurred a large capital gain or any change as a result of merging into the institutional class. Couldn't Vanguard have done the same thing or am I missing something?
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by beyou »

Grt2bOutdoors wrote: Wed Jan 26, 2022 6:54 am
winterfan wrote: Wed Jan 26, 2022 6:46 am I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
The institutions sold out of the higher expense ratio funds to move into the lower cost institutional level funds. That stampede led to a mass liquidation of shares and thus distributions of capital gains on a pro rata share across all shareholders.
This is a tax argument against pretty much all mutual funds. Not ETFs, some of which can exchange “in-kind” to avoid the impact of other shareholder redemptions. This is the primary selling point used by high net worth asset managers to open separate accounts with individual stocks and bonds (at high fees).
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by beyou »

livesoft wrote: Wed Jan 26, 2022 6:28 am
sleepysurf wrote: Wed Jan 26, 2022 6:25 am Perhaps Vanguard, and others, will eventually create ETF share classes for their Target Date (and Life Strategy type) funds.
Another implementation could be that Vanguard Target Retirement and LifeStrategy funds do NOT own any underlying mutual funds, but they would own the corresponding ETFs instead. That is, a fund of ETFs, or a set of ETFs in a mutual fund wrapper.
None of these ideas would necessarily have prevented all cap gain dividends resulting from investor redemptions and/or rebalancing a TD fund.

Harder to do in-kind redemptions of bonds than stocks, if they went the ETF share class route.

If they go with an open end fund holding ETFs, large redemptions of the TDF still require trading ETFs, and you can have cap gains no different than selling your own directly held ETF. Same for rebalance.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by JoMoney »

Another WSJ article
https://www.wsj.com/articles/massachuse ... 1643145644

[Link removed by admin LadyGeek]

Explaining the state of Massachusetts is doing an investigation into Target-Date funds, the tax-issues associated with them, and the disclosures about that from the fund companies.
... “Investors need to be made aware of the risks involved and the tax liabilities they could face in certain circumstances,” Mr. Galvin said, “and I want to make sure institutions are being upfront about these risks.”
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by treecat »

I looked at Target Retirement Income. The 2021 short and long-term capital gains, I think, were 0.24% and 1.53% respectively. If you look at the historical distributions wiki page (https://www.bogleheads.org/wiki/Vanguar ... ncome_Fund), this is a lot higher than the average of ~0.3% total, but a few years (2014, 2016) had comparable amounts.

I was one of the people hit by this. I was holding Target Retirement Income in a taxable account for convenience -- its allocation made sense for the account's purpose and I didn't want to bother separating stock vs. bond funds -- and I justified it by noting the historical average cap gain distributions would have resulted in what seemed like a pretty minor tax drag. But this CG distribution was large enough, that it seemed to make more sense to just sell it before the distribution hit (especially if similarly sized ones were to happen in the future!). Relying on historical averages isn't the way to go for analyzing potential CG distributions, I guess.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by LadyGeek »

I removed a link to a website which bypasses the WSJ Terms of Use.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by jmch1990 »

I am not sure if this was suggested in the middle of the thread (this is a long one) and apologize if I am repeating someone, but I would support adding a note to the wiki about tax inefficiency of target date funds and other similar balanced funds. I am lucky that I did not have a TDF in my taxable account, but it feels like a common and easily misunderstood mistake for investors starting out with taxable.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by alex_686 »

beyou wrote: Wed Jan 26, 2022 8:14 am Harder to do in-kind redemptions of bonds than stocks, if they went the ETF share class route.
Only in a trivial sense. Bond ETF funds work just fine.
beyou wrote: Wed Jan 26, 2022 8:14 am If they go with an open end fund holding ETFs, large redemptions of the TDF still require trading ETFs, and you can have cap gains no different than selling your own directly held ETF. Same for rebalance.
To underscore a point, you are talking about open-ended mutual funds but not about open-ended Exchange Traded Funds. ETFs which are funds of funds should still be able to sidestep the capital gains issue.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

jmch1990 wrote: Wed Jan 26, 2022 8:48 am I am not sure if this was suggested in the middle of the thread (this is a long one) and apologize if I am repeating someone, but I would support adding a note to the wiki about tax inefficiency of target date funds and other similar balanced funds. I am lucky that I did not have a TDF in my taxable account, but it feels like a common and easily misunderstood mistake for investors starting out with taxable.
https://www.bogleheads.org/wiki/Target_ ... ents_funds already says:
These funds all have an increasing and/or large allocation to bonds. Since bond fund distributions are considered ordinary income (taxed at your marginal tax rate), you will pay higher taxes than a stock fund (taxed at a lower capital gains rate). Therefore, the most suitable location for target date funds is in tax-advantaged accounts.

If there is high likelihood of a low tax bracket for the intended holding period, these funds might be appropriate in a taxable account. Investors having both taxable and tax-advantaged accounts are generally better served by splitting their equity and fixed income allocations, concentrating on tax-efficient asset location.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by jmch1990 »

Da5id wrote: Wed Jan 26, 2022 8:55 am
jmch1990 wrote: Wed Jan 26, 2022 8:48 am I am not sure if this was suggested in the middle of the thread (this is a long one) and apologize if I am repeating someone, but I would support adding a note to the wiki about tax inefficiency of target date funds and other similar balanced funds. I am lucky that I did not have a TDF in my taxable account, but it feels like a common and easily misunderstood mistake for investors starting out with taxable.
https://www.bogleheads.org/wiki/Target_ ... ents_funds already says:
These funds all have an increasing and/or large allocation to bonds. Since bond fund distributions are considered ordinary income (taxed at your marginal tax rate), you will pay higher taxes than a stock fund (taxed at a lower capital gains rate). Therefore, the most suitable location for target date funds is in tax-advantaged accounts.

If there is high likelihood of a low tax bracket for the intended holding period, these funds might be appropriate in a taxable account. Investors having both taxable and tax-advantaged accounts are generally better served by splitting their equity and fixed income allocations, concentrating on tax-efficient asset location.
True, however the mention of it in the general tax efficient fund placement wiki (which I would presume is much more popular) is much softer:
Tax efficiency of balanced funds
Balanced funds (stocks and bonds) are very popular among individual investors. These funds hold a variety of asset classes in one simple fund instead of several. They have a variety of names such as balanced, lifestyle, or target retirement funds. Since these funds include both stocks and bonds their tax efficiency sits somewhere between stocks and bonds.

If you have a balanced fund in a taxable account, you cannot sell only the bonds (to hold bonds in a different account, or to hold fewer bonds, or to hold a different type of bonds); you have to sell the whole fund, which can result in realizing a capital gain.

In a taxable account, the bond dividends will get taxed at ordinary income rates; in addition, the investor loses the option to harvest losses of individual asset classes. The more efficient strategy is to own the individual asset classes in separate funds and in their most tax-efficient locations.
The phrasing here makes it sound like they're moderate on the inefficiency scale. I believe including examples (like this year's 17% drop) would make it much clearer that it is a bad idea to use them in taxable.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

jmch1990 wrote: Wed Jan 26, 2022 9:03 am The phrasing here makes it sound like they're moderate on the inefficiency scale. I believe including examples (like this year's 17% drop) would make it much clearer that it is a bad idea to use them in taxable.
I disagree. This years steep capital gains distribution spike was due to nasty small investor unfavorable behavior on Vanguard's part causing mass redemptions by big holders. It wasn't inherently a feature of TDF/balanced funds. Balanced funds aren't ideal in terms of efficiency, but they do help mitigate bad investor behaviors. I don't personally want them anywhere, but I think it isn't a "bad idea" to use them in taxable, just sub-optimal.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by jmch1990 »

Da5id wrote: Wed Jan 26, 2022 9:11 am
jmch1990 wrote: Wed Jan 26, 2022 9:03 am The phrasing here makes it sound like they're moderate on the inefficiency scale. I believe including examples (like this year's 17% drop) would make it much clearer that it is a bad idea to use them in taxable.
I disagree. This years steep capital gains distribution spike was due to nasty small investor unfavorable behavior on Vanguard's part causing mass redemptions by big holders. It wasn't inherently a feature of TDF/balanced funds. Balanced funds aren't ideal in terms of efficiency, but they do help mitigate bad investor behaviors. I don't personally want them anywhere, but I think it isn't a "bad idea" to use them in taxable, just sub-optimal.
To use your language, I would support updating the first sentence to something akin to "Balanced funds (stocks and bonds) are very popular among individual investors, but are sub-optimal in taxable accounts." It is burying the lede otherwise.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by dbr »

Da5id wrote: Wed Jan 26, 2022 9:11 am
jmch1990 wrote: Wed Jan 26, 2022 9:03 am The phrasing here makes it sound like they're moderate on the inefficiency scale. I believe including examples (like this year's 17% drop) would make it much clearer that it is a bad idea to use them in taxable.
I disagree. This years steep capital gains distribution spike was due to nasty small investor unfavorable behavior on Vanguard's part causing mass redemptions by big holders. It wasn't inherently a feature of TDF/balanced funds. Balanced funds aren't ideal in terms of efficiency, but they do help mitigate bad investor behaviors. I don't personally want them anywhere, but I think it isn't a "bad idea" to use them in taxable, just sub-optimal.
I agree that the present glitch was terrible behavior on Vanguard's part and does not represent the actual sub-optimal use of TD funds in taxable accounts. I have noticed the biggest gotcha one reads about on the forum regarding choosing funds in taxable accounts is making a wrong choice and letting it appreciate so much that it is too expensive to change later. That problem would apply to anything from a balanced fund to individual stocks to funds from the wrong fund company, or anything else.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Whakamole »

Ferdinand2014 wrote: Wed Jan 26, 2022 8:03 am I have had Fidelity for 22 years. Throughout this time, I have had the Fidelity 500 index fund. It has gone through various iterations over the years with various share classes and cost structures. It merged several years ago into the institutional fund with 0 minimum investment, 0 minimum balance and the same cost as the institutional class at 1.5 basis points. Even the ticker symbol changed to the institutional version. However, I never incurred a large capital gain or any change as a result of merging into the institutional class. Couldn't Vanguard have done the same thing or am I missing something?
Yes, Vanguard could have merged the investor and institutional share classes, then lowered the ER, like Fidelity did. Vanguard has announced that they will be merging the funds, but did this long after the minimum was lowered - and too late to save individual investors who owned the fund in taxable.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by GaryA505 »

Grt2bOutdoors wrote: Wed Jan 26, 2022 6:54 am
winterfan wrote: Wed Jan 26, 2022 6:46 am I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
The institutions sold out of the higher expense ratio funds to move into the lower cost institutional level funds. That stampede led to a mass liquidation of shares and thus distributions of capital gains on a pro rata share across all shareholders.
It sounds like people are saying that can't happen with Vanguard mutual funds that have an ETF share class, is that correct or not?
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Re: Rob Berger says vanguard threw me under a bus !

Post by GaryA505 »

Cubicle wrote: Wed Jan 26, 2022 12:28 am Mutual funds (at Vanguard, at least until until their patent expires (2023 I think)) which have an ETF share class will not have this problem.

Vanguard mutual funds without an ETF share class are vulnerable.

Other company's mutual funds are also vulnerable.
Can you explain? Why will mutual funds that have an ETF share class not have this problem?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Taxable account. Never knew that Vanguard can pull the rug under small investors , but they did!

Post by alex_686 »

GaryA505 wrote: Wed Jan 26, 2022 11:03 am
Grt2bOutdoors wrote: Wed Jan 26, 2022 6:54 am
winterfan wrote: Wed Jan 26, 2022 6:46 am I guess I don't understand the mechanics of this. If they lowered the amount institutions can invest, how does that give regular people a distribution? How much of a gain did they distribute?
The institutions sold out of the higher expense ratio funds to move into the lower cost institutional level funds. That stampede led to a mass liquidation of shares and thus distributions of capital gains on a pro rata share across all shareholders.
It sounds like people are saying that can't happen with Vanguard mutual funds that have an ETF share class, is that correct or not?
Yes. Probably. The normal redemption-in-kind process side steps the capital gain issue. However this process might not work in times of crisis when there is a stampede to the door. The fund might have to actually sell the ETFs which would generate capital gains. Or maybe during a times of crisis the redemption process works better than the trading process. I have seen it go both ways.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by rob »

I find the defense of Vanguard on this topic just funny in the cool-aid funny way....
- This is a Vanguard caused issue not a market one (read the article). In my view: Vanguard either did not know or manage or understand (incompetence) or did not care (apathy or worse to retail investors).
- Funds that suddenly kick off large distributions after long periods of not have been laughed at in the past here; why is this different.
- This is not the first event that hints at a lack of care for retail investors. IMO Vanguard is screaming they don't care about retail at this point instead of just hinting at it.
- These funds are recommended here a lot and rarely is it only tax deferred warning. In my case these were a nice way to use for kids accounts (my main portfolio is far more aware of tax issues) but now I am firmly in the kiddy tax arena.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Ed 2 »

rob wrote: Wed Jan 26, 2022 11:42 am I find the defense of Vanguard on this topic just funny in the cool-aid funny way....
- This is a Vanguard caused issue not a market one (read the article). In my view: Vanguard either did not know or manage or understand (incompetence) or did not care (apathy or worse to retail investors).
- Funds that suddenly kick off large distributions after long periods of not have been laughed at in the past here; why is this different.
- This is not the first event that hints at a lack of care for retail investors. IMO Vanguard is screaming they don't care about retail at this point instead of just hinting at it.
- These funds are recommended here a lot and rarely is it only tax deferred warning. In my case these were a nice way to use for kids accounts (my main portfolio is far more aware of tax issues) but now I am firmly in the kiddy tax arena.
++++1. Some probably don’t play chess, Rob ;)

I simply went online and looked what is the minimum to open Institutional Total International Index fund and Wow! If this fund is not next....
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Ferdinand2014 »

Whakamole wrote: Wed Jan 26, 2022 9:49 am
Ferdinand2014 wrote: Wed Jan 26, 2022 8:03 am I have had Fidelity for 22 years. Throughout this time, I have had the Fidelity 500 index fund. It has gone through various iterations over the years with various share classes and cost structures. It merged several years ago into the institutional fund with 0 minimum investment, 0 minimum balance and the same cost as the institutional class at 1.5 basis points. Even the ticker symbol changed to the institutional version. However, I never incurred a large capital gain or any change as a result of merging into the institutional class. Couldn't Vanguard have done the same thing or am I missing something?
Yes, Vanguard could have merged the investor and institutional share classes, then lowered the ER, like Fidelity did. Vanguard has announced that they will be merging the funds, but did this long after the minimum was lowered - and too late to save individual investors who owned the fund in taxable.
I see. I remember when the switch happened at Fidelity, It was an email announcement telling us nothing we needed to take action on. I just noticed the ticker symbol changed and the expense ratio dropped the same day in my accounts - so the merge and expense drop happened at the same time. They did this for all of their index funds and several of their more popular active funds at the same time.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by GaryA505 »

I suspect Vanguard knew exactly how much this was going to cost retail investors who had TDFs in their taxable accounts, and they decided to do it anyway, to make their large institutional investors happy. They probably figured, "well we warned them about putting TDFs in a taxable account". The thing is, while it's true that those investors should have expected some periodic cap gains, I doubt they expected anything like this.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Whakamole »

Ferdinand2014 wrote: Wed Jan 26, 2022 12:17 pm
Whakamole wrote: Wed Jan 26, 2022 9:49 am
Ferdinand2014 wrote: Wed Jan 26, 2022 8:03 am I have had Fidelity for 22 years. Throughout this time, I have had the Fidelity 500 index fund. It has gone through various iterations over the years with various share classes and cost structures. It merged several years ago into the institutional fund with 0 minimum investment, 0 minimum balance and the same cost as the institutional class at 1.5 basis points. Even the ticker symbol changed to the institutional version. However, I never incurred a large capital gain or any change as a result of merging into the institutional class. Couldn't Vanguard have done the same thing or am I missing something?
Yes, Vanguard could have merged the investor and institutional share classes, then lowered the ER, like Fidelity did. Vanguard has announced that they will be merging the funds, but did this long after the minimum was lowered - and too late to save individual investors who owned the fund in taxable.
I see. I remember when the switch happened at Fidelity, It was an email announcement telling us nothing we needed to take action on. I just noticed the ticker symbol changed and the expense ratio dropped the same day in my accounts - so the merge and expense drop happened at the same time. They did this for all of their index funds and several of their more popular active funds at the same time.
I'm not certain if Fidelity was intentionally trying to eliminate the capital gains problem, or whether it was just easier on their end to fold all share classes into the institutional share class and be done with it.

This also wouldn't have been a problem if Vanguard lowered the ER on non-Institutional class shares first and then combined the share classes at a later date.
z0r
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by z0r »

another wiki edit candidate:

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

under "tax efficiency"

"Advantage: ETFs, or tie if Vanguard."

the word "tie" is hiding a lot of nuance. I'd probably change it to just "advantage: ETFs" and edit the text to note problems like this
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by sycamore »

Whakamole wrote: Wed Jan 26, 2022 12:56 pm
Ferdinand2014 wrote: Wed Jan 26, 2022 12:17 pm
Whakamole wrote: Wed Jan 26, 2022 9:49 am
Ferdinand2014 wrote: Wed Jan 26, 2022 8:03 am I have had Fidelity for 22 years. Throughout this time, I have had the Fidelity 500 index fund. It has gone through various iterations over the years with various share classes and cost structures. It merged several years ago into the institutional fund with 0 minimum investment, 0 minimum balance and the same cost as the institutional class at 1.5 basis points. Even the ticker symbol changed to the institutional version. However, I never incurred a large capital gain or any change as a result of merging into the institutional class. Couldn't Vanguard have done the same thing or am I missing something?
Yes, Vanguard could have merged the investor and institutional share classes, then lowered the ER, like Fidelity did. Vanguard has announced that they will be merging the funds, but did this long after the minimum was lowered - and too late to save individual investors who owned the fund in taxable.
I see. I remember when the switch happened at Fidelity, It was an email announcement telling us nothing we needed to take action on. I just noticed the ticker symbol changed and the expense ratio dropped the same day in my accounts - so the merge and expense drop happened at the same time. They did this for all of their index funds and several of their more popular active funds at the same time.
I'm not certain if Fidelity was intentionally trying to eliminate the capital gains problem, or whether it was just easier on their end to fold all share classes into the institutional share class and be done with it.

This also wouldn't have been a problem if Vanguard lowered the ER on non-Institutional class shares first and then combined the share classes at a later date.
That could have been the case. However, I'm not sure Vanguard could have simply lowered the ER on the Investor class first. In general Vanguard has said they runs their funds "at cost" (which includes the salary/bonus/benefit costs of employees, among other things) and so they don't just set their ER ahead of time. I don't work there and I don't know if that approach is written in stone or what, but I think we're just speculating. My guess is the lowered ER only happens if they combine the two funds and thereby gain economies of scale.

Regarding Fidelity, their Target Date funds had significant changes to their holdings in 2019, which caused large cap gains distributions. The cause is different from what happened with Vanguard TD funds in 2021, but the effect was similar.

The Fidelity issue was discussed here: viewtopic.php?p=4923776#p4923776. "cas" ended the post presciently: "But let the buyers of target date funds take note before considering putting such a fund in a taxable account."
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by alex_686 »

GaryA505 wrote: Wed Jan 26, 2022 12:21 pm I suspect Vanguard knew exactly how much this was going to cost retail investors who had TDFs in their taxable accounts, and they decided to do it anyway, to make their large institutional investors happy.
They kind of have too. The institutional fund has a independent board whose goal is to maximize value to their shareholders. This includes setting fees. Expanding the asset base is usually considered a positive. They don't have any obligation to the retail fund.

The retail version of the fund has a separate independent board.

Now I think Vanguard dropped the ball here. But maybe there was a legitimate conflict of interest, or a divergence of interests, or something. Maybe the retail fund was dragging its feat for so long that the institutional side decided that they had no choice but to pull the trigger. Who knows.

But the board of the institutional fund must put their clients - big institutions - interest first. Not Vanguard and not the retail version.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by GaryA505 »

As one who has accounts at both Vanguard and Fidelity, AND would like to consolidate at one of them, AND is on the fence about which one to choose, this may help me make a decision. I mean, Vanguard threw their retail investors under the bus once already, so what's to stop them from doing it with other funds? Could VFIAX and VTSAX be next? Why not, nobody saw this one coming either.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Whakamole »

sycamore wrote: Wed Jan 26, 2022 1:10 pm That could have been the case. However, I'm not sure Vanguard could have simply lowered the ER on the Investor class first. In general Vanguard has said they runs their funds "at cost" (which includes the salary/bonus/benefit costs of employees, among other things) and so they don't just set their ER ahead of time. I don't work there and I don't know if that approach is written in stone or what, but I think we're just speculating. My guess is the lowered ER only happens if they combine the two funds and thereby gain economies of scale.

Regarding Fidelity, their Target Date funds had significant changes to their holdings in 2019, which caused large cap gains distributions. The cause is different from what happened with Vanguard TD funds in 2021, but the effect was similar.

The Fidelity issue was discussed here: viewtopic.php?p=4923776#p4923776. "cas" ended the post presciently: "But let the buyers of target date funds take note before considering putting such a fund in a taxable account."
The fund consolidation into a single share class (with an institutional-level ER) should have worked. I'm not sure why Vanguard didn't do this. If they couldn't, they should explain themselves to shareholders being hit with high tax bills. Shareholders quite literally own the funds, according to Vanguard.

Fidelity Target Date funds had a different cause (fund makeup changes) that could have been prevented or mitigated, but that points out a problem that isn't isolated to target date funds, or even asset allocation funds.
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