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

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Re: Target date funds ... so much for "set and forget"

Post by LadyGeek »

Jason Zweig wrote: Fri Jan 21, 2022 11:10 am I wrote a column about this in today's WSJ:

https://www.wsj.com/articles/vanguard-t ... 1642781228

Jason Zweig
Welcome! I confirm Jason Zweig is the author of the WSJ article.
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Re: Target date funds ... so much for "set and forget"

Post by burritoLover »

Whakamole wrote: Fri Jan 21, 2022 11:00 am
burritoLover wrote: Fri Jan 21, 2022 10:52 am Sure, if you are lucky enough to have millions (in this case 6.4M) in a taxable account, then, sure, a TDF there would be a bad idea. Most don't have this "problem" in taxable so a TDF could be perfectly fine. With all the investors here adjusting their US, international and bond allocations when they underperform or when they think they are "overvalued", they'd probably be better off in a TDF even after taxes.
Even if it significantly less than 6.4M, a higher earner could easily have a few hundred thousand in taxable accounts - and a tax bill paid at 20% capital gains that could have been entirely avoided.
You think rebalancing to follow a bond glidepath that a TDF has is going to result in no tax events over that period if you have a 3-funder?
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Re: Target date funds ... so much for "set and forget"

Post by Scorpion Stare »

burritoLover wrote: Fri Jan 21, 2022 11:40 am You think rebalancing to follow a bond glidepath that a TDF has is going to result in no tax events over that period if you have a 3-funder?
The three-fund portfolio doesn't eliminate the tax consequences of rebalancing, but it makes them more controllable and predictable.

For example, when I rebalance my three-fund portfolio, I can choose based on my current tax needs whether to sell my highest-basis lots or my lowest-basis lots, or even to delay rebalancing until a later year when I can pay a lower tax rate on the gains. Or during much of my accumulation phase, I may be able to rebalance using only new money, without realizing any gains at all.

But if I hold a target date fund, I can neither control nor predict which of the fund's gains will be realized at what time. This can cost me a lot of money if the fund distributes a large amount of gains at a time when I owe a higher than normal tax rate on those gains. It's especially bad for tax planning when distributions happen in the last week of December, when it might be too late to offset it by adjusting other plans. (This is what happened when Vanguard's funds had an unusually large distribution at the end of last month.)
Last edited by Scorpion Stare on Fri Jan 21, 2022 12:29 pm, edited 1 time in total.
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Re: Target date funds ... so much for "set and forget"

Post by Whakamole »

burritoLover wrote: Fri Jan 21, 2022 11:40 am
Whakamole wrote: Fri Jan 21, 2022 11:00 am
burritoLover wrote: Fri Jan 21, 2022 10:52 am Sure, if you are lucky enough to have millions (in this case 6.4M) in a taxable account, then, sure, a TDF there would be a bad idea. Most don't have this "problem" in taxable so a TDF could be perfectly fine. With all the investors here adjusting their US, international and bond allocations when they underperform or when they think they are "overvalued", they'd probably be better off in a TDF even after taxes.
Even if it significantly less than 6.4M, a higher earner could easily have a few hundred thousand in taxable accounts - and a tax bill paid at 20% capital gains that could have been entirely avoided.
You think rebalancing to follow a bond glidepath that a TDF has is going to result in no tax events over that period if you have a 3-funder?
You can look at the distributions of Vanguard's TDFs to see that historically this hasn't been a big issue, since new money was being invested in the fund. According to Yahoo Finance (plus Vanguard's site for 2021), here are the capital gains payouts for VFORX, the 2040 fund:

Dec 21, 2021 7.689 Capital Gain
Dec 30, 2020 0.194 Capital Gain
Dec 28, 2018 0.056 Capital Gain
Dec 28, 2017 0.014 Capital Gain
Dec 28, 2016 0.125 Capital Gain
Dec 29, 2015 0.235 Capital Gain
Dec 29, 2014 0.017 Capital Gain
Dec 26, 2013 0.007 Capital Gain
Dec 28, 2012 0.007 Capital Gain
Dec 29, 2011 0.009 Capital Gain
Dec 30, 2010 0.072 Capital Gain

There is a huge difference between relatively modest capital gains being paid out due to rebalancing that cannot be accounted for in new money, and corporate mismanagement causing excessive capital gains.

I would rephrase this wording on our wiki:
Target date retirement funds include all assets in one fund and do not allow a tax-efficient fund placement of each individual asset class.

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.

Note: Taxes considerations are secondary to selecting the desired asset allocation.
To:
Do not own target date retirements funds in taxable.
That advice should go for any asset allocation fund.

I would prefer that this not be the case. Many investors understand that they want a stock/bond allocation, but don't want to manage allocation between taxable, tax-deferred, and tax-free accounts to provide an optimal solution, risk having recent market performance drive asset allocation changes, or keeping track of their glide path. The minor tax hit (the small capital gains pre-2021) was a small price to pay.

Note the investor in this thread opened his VFORX position in 2020, and did not complain at all about the capital gains being paid out that year.

I do not own target date funds in taxable, but I invested my mother's modest funds in them since she is retired ("If there is high likelihood of a low tax bracket for the intended holding period, these funds might be appropriate in a taxable account.")
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Re: Target date funds ... so much for "set and forget"

Post by ThisTooShallPass123 »

burritoLover wrote: Fri Jan 21, 2022 11:40 am You think rebalancing to follow a bond glidepath that a TDF has is going to result in no tax events over that period if you have a 3-funder?
Not "no tax events", but this is what Vanguard is saying about TDF: Spokeswoman Carolyn Wegemann said that because the Target Retirement approach seeks to reduce risk over time by automatically trimming stock positions, “these funds are best served in a tax-deferred account.”

And as Jason Zweig mentions: Yet nowhere on the funds’ main pages at Vanguard.com does the firm tell investors that the funds aren’t ideal for taxable accounts.

Technically Vanguard didn't do anything wrong. But again from the article, "a change that benefitted big clients left little ones holding the bag". It's not unnatural it rubs people the wrong way.
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Re: Target date funds ... so much for "set and forget"

Post by H-Town »

If we can find a positive out of this situation, this should bring tax awareness to many people out there.

There are 2 things in our control that matter:
1) The amount we save, and
2) Tax planning
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Re: Wall Street Journal article about Vanguard distributions

Post by LK2012 »

cas wrote: Fri Jan 21, 2022 11:01 am
LK2012 wrote: Fri Jan 21, 2022 10:26 am After Vanguard lowered the minimum investment threshold for Institutional Target Retirement Funds from $100 Million to $5 Million, there was a tsunami of the large corporate retirement accounts moving out of standard Target Retirement Funds into the Institutional Target Funds. As they moved, the resulting sales compelled the funds to "offload holdings."
Out of curiosity, does the article give specifics on where they got the above information? Vanguard spokesperson?

I ask because I was curious when I saw the large upcoming distributions listed in November, poked around in the semi-annual report some, and wrote a boglehead's post (plus next post down with Vanguard news release, plus follow-up post after annual report came out) saying "hmmm ... seems to be a couple of different things going on here, and several possibilities, but possibly part of it might be 401(k) plans moving from investor to institutional class after the minimum-assets drop?"

And ever since, there has been a series of other boglehead's posts leading to a more thorough blog post (not by me) leading to more boglehead's posts (leading to WSJ article? ) getting more and more definite/irate that This Is The Cause .. some of which cite my original post directly. Except I'm a complete amateur at reading annual reports, so the "game of telephone" that seems to lead back to me has been a bit ... interesting ... to watch.

But WSJ, in theory, has more expertise and sources they can tap, so I'm curious to know if they indicated that they did.

(I don't have a WSJ subscription, so I can't access the article.)
The article is by Jason Zweig, under Markets - The Intelligent Investor, additional reporting by Caitlin McCabe

Bogleheads is mentioned and this thread is linked viewtopic.php?f=10&t=362699&p=6414170#p6414170

A Reddit Bogleheads forum is mentioned, and "Sitting-Hawk" is quoted.

They said Vanguard had no comment about how upset individual investors with taxable money in these funds were, but they quote Spokeswoman Carolyn Wegemann, who responded by saying "that because the Target Retirement approach seeks to reduce risk over time by automatically trimming stock positions, 'these funds are best served in a tax-deferred account.'”
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Re: Target date funds ... so much for "set and forget"

Post by burritoLover »

For extreme DIYers like many on here, I think it is good advice to avoid a TDF in taxable. But for some mild DIYers, they aren't going to be picking out tax lots to sell or other mechanics to lessen the blow to taxes when rebalancing. So to just say flat out - never put a TDF in taxable might do more harm than good for some. Not to mention the behavioral mistakes that run rampant when anyone from mild to experienced DIYers can twist the knobs on a 3-funder - getting out of international, getting out of bonds, adding tilts, etc.
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Re: Wall Street Journal article about Vanguard distributions

Post by hofelsherr »

I don't understand how a move from one share class to another would cause this type of disruption. Isn't it normally a shift similar to moving from investor class to admiral or similar? Or an ETF conversion? Is it possible that a huge number of small 401k plans went in and did exchanges into the newly available share class, and that the sell-to-buy mechanism created the liquidations and the disruption?
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Re: Wall Street Journal article about Vanguard distributions

Post by Makefile »

hofelsherr wrote: Fri Jan 21, 2022 12:34 pm I don't understand how a move from one share class to another would cause this type of disruption. Isn't it normally a shift similar to moving from investor class to admiral or similar? Or an ETF conversion? Is it possible that a huge number of small 401k plans went in and did exchanges into the newly available share class, and that the sell-to-buy mechanism created the liquidations and the disruption?
The Vanguard Institutional funds are separate funds entirely, not just a separate share class, it seems.

Sad thing is the whole thing was all for nought as the Institutional and Admiral Target Retirement funds are supposed to merge next month. Presumably, had the $100 million/$5 million thing not happened first and they just merged in the first place, the distribution may not have happened...
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Re: Target date funds ... so much for "set and forget"

Post by ThisTooShallPass123 »

"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama

Unless you put your money in a TDF in a taxable account, then you should handle it a bit more because Vanguard will give institutional investors a better version than you get and surprise the average retail customer with a large tax bill. Their spokesperson will admit “these funds are best served in a tax-deferred account" but they won't say that any other place.
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Re: Target date funds ... so much for "set and forget"

Post by burritoLover »

news flash - Vanguard isn't the only one offering TDFs.
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Re: Target date funds ... so much for "set and forget"

Post by ThisTooShallPass123 »

Just giving advice to the topic author, who did use Vanguard, while also quoting the Vanguard spokesperson.
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Re: Wall Street Journal article about Vanguard distributions

Post by Da5id »

If the article has it all right, Vanguard served its small investors very very poorly in making this change.

That said, even if Vanguard didn't advise against holding them in taxable, or do this transition in a bad way, TDF/LifeStrategy funds are really not great choices in taxable accounts.
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Re: Wall Street Journal article about Vanguard distributions

Post by cas »

LK2012 wrote: Fri Jan 21, 2022 12:22 pm Bogleheads is mentioned and this thread is linked viewtopic.php?f=10&t=362699&p=6414170#p6414170
Hmmm ... that *is* the thread where I made the posts speculating on the cause, although that particular link seems to link randomly into the middle of the thread. So who knows if anyone at WSJ was looking at my posts in particular or not when they were figuring out The Cause.

Just in case, I guess now is the time to raise my hand, wave it, and say "I'm really an ignoramus when it comes to reading annual reports. Any speculation I make based on annual reports should be taken with a large grain of salt and thoroughly vetted before it is believed, much less passed on as truth."

hofelsherr wrote: Fri Jan 21, 2022 12:34 pm I don't understand how a move from one share class to another would cause this type of disruption. Isn't it normally a shift similar to moving from investor class to admiral or similar? Or an ETF conversion?
Here's a relatively minor example why I'm uncomfortable with the possibility that some of my speculation "game-of-telephoned" into more definite statements than I personally am comfortable with.

In that original post I speculated...
cas wrote: Thu Nov 18, 2021 10:51 am People have noted that the institutional target date funds do not have the large cap gain distributions. Is the institutional version perhaps not a share class of the "regular" version? (I didn't look it up.) If so, were companies perhaps shifting from "regular" to "institutional" within their 401(k)s, causing net redemptions in the "regular" target date fund?
I didn't put in the effort to look up whether the institutional and investor versions were different funds or different share classes of the same fund before I speculated. (Although maybe I did, indirectly, 6 weeks later, when I referred to separate annual reports for the investor and institutional versions. I think separate annual reports confirms that they are different funds, not different share classes of the same fund?) In any case ... as far as I've seen, ***nobody else in bogleheads discussion confirmed that particular point either*** before continuing on with the discussion. As hofelsherr correctly points out, if investor/institutional turn out to be different share classes of the same fund, that whole line of reasoning about The Cause falls apart.
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Re: Wall Street Journal article about Vanguard distributions

Post by Jason Zweig »

cas wrote: Fri Jan 21, 2022 11:01 am
LK2012 wrote: Fri Jan 21, 2022 10:26 am After Vanguard lowered the minimum investment threshold for Institutional Target Retirement Funds from $100 Million to $5 Million, there was a tsunami of the large corporate retirement accounts moving out of standard Target Retirement Funds into the Institutional Target Funds. As they moved, the resulting sales compelled the funds to "offload holdings."
Out of curiosity, does the article give specifics on where they got the above information? Vanguard spokesperson?

I ask because I was curious when I saw the large upcoming distributions listed in November, poked around in the semi-annual report some, and wrote a boglehead's post (plus next post down with Vanguard news release, plus follow-up post after annual report came out) saying "hmmm ... seems to be a couple of different things going on here, and several possibilities, but possibly part of it might be 401(k) plans moving from investor to institutional class after the minimum-assets drop?"

And ever since, there has been a series of other boglehead's posts leading to a more thorough blog post (not by me) leading to more boglehead's posts (leading to WSJ article? ) getting more and more definite/irate that This Is The Cause .. some of which cite my original post directly. Except I'm a complete amateur at reading annual reports, so the "game of telephone" that seems to lead back to me has been a bit ... interesting ... to watch.

But WSJ, in theory, has more expertise and sources they can tap, so I'm curious to know if they indicated that they did.

(I don't have a WSJ subscription, so I can't access the article.)
That is correct. A spokeswoman for Vanguard confirmed to me that a major factor contributing to the unusually large capital-gains distribution in 2021 was the migration of corporate plans to the Institutional versions of the Target Retirement funds. Note that these are not a share class within the same family, but rather a separate series of funds. Therefore, the corporate plans couldn't convert their holdings, but rather had to sell them, in order to be able to move into the Institutional versions. As Morningstar's Jeff Ptak noted on Twitter today , the outflows from the regular Target Retirement funds and the inflows into the Institutional versions are almost mirror images in 2021.

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Re: Wall Street Journal article about Vanguard distributions

Post by Whakamole »

LK2012 wrote: Fri Jan 21, 2022 12:22 pm They said Vanguard had no comment about how upset individual investors with taxable money in these funds were, but they quote Spokeswoman Carolyn Wegemann, who responded by saying "that because the Target Retirement approach seeks to reduce risk over time by automatically trimming stock positions, 'these funds are best served in a tax-deferred account.'”
Vanguard is completely tone-deaf - glide path adjustments had nothing to do with excess distributions.
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Re: Target date funds ... so much for "set and forget"

Post by LadyGeek »

burritoLover wrote: Fri Jan 21, 2022 12:46 pm news flash - Vanguard isn't the only one offering TDFs.
That's old news for ETFs and mutual funds. See: ETFs for Bogleheads and Mutual funds for Bogleheads

Does anyone want to update the wiki page? Target date funds It's only focused on Vanguard because no one has gotten around to updating the content.
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Re: Wall Street Journal article about Vanguard distributions

Post by Da5id »

Whakamole wrote: Fri Jan 21, 2022 1:25 pm
LK2012 wrote: Fri Jan 21, 2022 12:22 pm They said Vanguard had no comment about how upset individual investors with taxable money in these funds were, but they quote Spokeswoman Carolyn Wegemann, who responded by saying "that because the Target Retirement approach seeks to reduce risk over time by automatically trimming stock positions, 'these funds are best served in a tax-deferred account.'”
Vanguard is completely tone-deaf - glide path adjustments had nothing to do with excess distributions.
I'd say Vanguard's statement was "correct", in that glide path adjustments *can* do that. And also that these funds shouldn't really be held in taxable. But I agree with you that they were being utterly dishonest in attributing the distributions to those positions.
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Re: Target date funds ... so much for "set and forget"

Post by burritoLover »

ThisTooShallPass123 wrote: Fri Jan 21, 2022 12:58 pm Just giving advice to the topic author, who did use Vanguard, while also quoting the Vanguard spokesperson.
sure, I'm just saying don't throw the baby out with the bath water.
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Re: Target date funds ... so much for "set and forget"

Post by alex_686 »

ThisTooShallPass123 wrote: Fri Jan 21, 2022 12:18 pm And as Jason Zweig mentions: Yet nowhere on the funds’ main pages at Vanguard.com does the firm tell investors that the funds aren’t ideal for taxable accounts.

Technically Vanguard didn't do anything wrong. But again from the article, "a change that benefitted big clients left little ones holding the bag". It's not unnatural it rubs people the wrong way.
I will point out that if Vanguard did put that warning on any page - front or back - they will be doing something wrong. They would be offering specific investment advice.

To do that they need to set up a advisory relationship with you. For example, if they were to enter into a fiduciary advisory relationship the initial intake would take about an hour or 2 with yearly follow ups.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by LadyGeek »

I merged LK2012's thread into a similar discussion. Initially, the OP was asking for help. Subsequent posts then referenced the WSJ article which resulting in both threads discussing the article. The combined thread is in the Investing - Theory, News & General forum (general discussion).

Also note that the WSJ article author, Jason Zweig, is posting in this thread.
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Re: Target date funds ... so much for "set and forget"

Post by Makefile »

alex_686 wrote: Fri Jan 21, 2022 1:49 pm
ThisTooShallPass123 wrote: Fri Jan 21, 2022 12:18 pm And as Jason Zweig mentions: Yet nowhere on the funds’ main pages at Vanguard.com does the firm tell investors that the funds aren’t ideal for taxable accounts.

Technically Vanguard didn't do anything wrong. But again from the article, "a change that benefitted big clients left little ones holding the bag". It's not unnatural it rubs people the wrong way.
I will point out that if Vanguard did put that warning on any page - front or back - they will be doing something wrong. They would be offering specific investment advice.

To do that they need to set up a advisory relationship with you. For example, if they were to enter into a fiduciary advisory relationship the initial intake would take about an hour or 2 with yearly follow ups.
Interesting. I decided to look at a more egregious case of tax-exempt bond funds. Indeed the prospectus and webpage about Vanguard Tax-Exempt Bond Index Fund doesn't warn you not to buy it inside an IRA: https://investor.vanguard.com/mutual-fu ... view/vteax

But on more general sections on the Vanguard site, they do tell you not to buy tax-exempt bonds (in general sense) inside an IRA: https://investor.vanguard.com/mutual-funds/tax-exempt

Is it a gray area where a particular investment company can't tell you whether to buy that fund inside or outside an IRA, but the fund complex's "general" marketing materials can?
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Baltazarre »

Happened to me as well. Been in Target Date 2020 for 14 years. Always had some modest gains. Not a big deal and understood this. This year was shocked. Called Vanguard and was told it was a "five year rebalancing". The article in WSJ tells a completely different story. Large outflows caused by institutional $$ leaving the target date funds and going into the lower cost "admiral shares". Those of us remaining are required to pay for the gains incurred by sales needed to fund the institutional outflows.

No advance notice given to customers of a material change in capital gains for 2020.
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Re: Target date funds ... so much for "set and forget"

Post by alex_686 »

Makefile wrote: Fri Jan 21, 2022 1:58 pm Is it a gray area where a particular investment company can't tell you whether to buy that fund inside or outside an IRA, but the fund complex's "general" marketing materials can?
I worked in a closely adjacent field but it has been a few years, so I think I have a good handle on the general principles but maybe not the specific points.

If you look at the link provided it was full of weasel words. You could do this on the front page. "Before buying consider the possible impact of possible distributions considering your specific tax situation."

There are 2 problems with this.

First, I can think of another dozen warnings that could be piled on. If so this warning could get drowned.

Second, I can think of many situations were I would recommend a target date fund in taxable. For example, my mother - where the advantages of simplicity outweigh the tax disadvantages. Or people in a very low income bracket. Or somebody who has a large loss carry forward. etc.

For context I was working for a fund that was in a similar situation. And I thought that Vanguard was doing thing the right way. Specifically, there is only so much a large organization can do to hold the hand of it do-it-yourself clients.

But then I read another one of your posts which turned me around 180 degrees.
Makefile wrote: Fri Jan 21, 2022 12:39 pm Sad thing is the whole thing was all for nought as the Institutional and Admiral Target Retirement funds are supposed to merge next month. Presumably, had the $100 million/$5 million thing not happened first and they just merged in the first place, the distribution may not have happened...
Technically Vanguard did nothing wrong but they really failed in this particular case.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by alex_686 »

jscassidy wrote: Fri Jan 21, 2022 2:10 pm No advance notice given to customers of a material change in capital gains for 2020.
And they really can't. Funds are more or less barred from making speculative statements about the future by regulation.

If they make a statement that they will be making material changes latter this year then they must make those changes come hell or high water. Does it matter if the facts on the ground have changed or that they are in the middle of a pandemic that make the changes really really expensive. No. If the announce the changes then they are more or less committed.
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Re: Target date funds ... so much for "set and forget"

Post by Makefile »

alex_686 wrote: Fri Jan 21, 2022 2:17 pm Second, I can think of many situations were I would recommend a target date fund in taxable. For example, my mother - where the advantages of simplicity outweigh the tax disadvantages. Or people in a very low income bracket. Or somebody who has a large loss carry forward. etc.
Another thing is, as CITs continue to catch on, every time a company sells out of their 401(k)'s target date funds to move to CITs instead, isn't this maybe a ticking time bomb of massive redemptions for all target date mutual funds not just Vanguard's?
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Re: Target date funds ... so much for "set and forget"

Post by alex_686 »

Makefile wrote: Fri Jan 21, 2022 2:31 pm
alex_686 wrote: Fri Jan 21, 2022 2:17 pm Second, I can think of many situations were I would recommend a target date fund in taxable. For example, my mother - where the advantages of simplicity outweigh the tax disadvantages. Or people in a very low income bracket. Or somebody who has a large loss carry forward. etc.
Another thing is, as CITs continue to catch on, every time a company sells out of their 401(k)'s target date funds to move to CITs instead, isn't this maybe a ticking time bomb of massive redemptions for all target date mutual funds not just Vanguard's?
I don't think so but I am speculating here.

I don't think that there will be a massive shift to CITs. In particular not target date funds. However, it this situation were to arise then the mutual fund could distribute shares in-kind instead of cash to the CIT. This operates exactly the same as a ETF. For technical reasons this in-kind distribution is much harder to do for a mutual fund than for a ETF. This is a edge case which works for a mutual fund.
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Re: Target date funds ... so much for "set and forget"

Post by Whakamole »

Makefile wrote: Fri Jan 21, 2022 2:31 pm
alex_686 wrote: Fri Jan 21, 2022 2:17 pm Second, I can think of many situations were I would recommend a target date fund in taxable. For example, my mother - where the advantages of simplicity outweigh the tax disadvantages. Or people in a very low income bracket. Or somebody who has a large loss carry forward. etc.
Another thing is, as CITs continue to catch on, every time a company sells out of their 401(k)'s target date funds to move to CITs instead, isn't this maybe a ticking time bomb of massive redemptions for all target date mutual funds not just Vanguard's?
It's a potential time bomb for anything. For eaxmple, if large enough companies move from an S&P 500 fund to a CIT, there will be massive redemptions, enough to trigger capital gains. Presumably an ETF share class would help.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by WapelloHawk »

So pleased to read the WSJ article. Thank you to the author for taking the time to write about this mess and then link his article.

I started investing in the 2055 target date fund for my kids back in 2015. The cap gains have been next to nothing for years. To all the Monday morning QB's who say we should have known better than to invest in a taxable account, give me a break. As explained in the article and by my relationship manager back in early Dec, this was a one-time event due to a decision Vanguard made, it had nothing to do with the glide path.

I have a fair amount of money at Vanguard, enough to have the same dedicated relationship manager since 2012. Not a word of this issue was mentioned to me during 2021, even though it sounds like Vanguard knew about the impending cap gains the entire year. My kids were hit with the kiddie tax as a result. Salt in the wound.

Not a good look for a company I normally hold in high esteem.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by burritoLover »

Vanguard is probably trying to get more clients to leave cause they are overwhelmed. :P Or at least, worst case scenario, those with a death grip on staying with Vanguard will move to their robo-advisor platform which will happily invest in individual funds in taxable.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by bowest »

Any reason Vanguard could not have worked with plans to redeem assets in kind given how badly taxable would be screwed (surely there's some CYA language to this effect in prospectus saying it was an option as hedge against forced liquidation or catastrophic market movements) and then accept back in the institutional fund? Doesn't seem much more onerous than having to execute roundtrip sales and repurchases as the assets moved.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

WapelloHawk wrote: Fri Jan 21, 2022 3:24 pm I started investing in the 2055 target date fund for my kids back in 2015. The cap gains have been next to nothing for years. To all the Monday morning QB's who say we should have known better than to invest in a taxable account, give me a break. As explained in the article and by my relationship manager back in early Dec, this was a one-time event due to a decision Vanguard made, it had nothing to do with the glide path.
TD funds aren't great in a taxable account separate from Vanguard's brutal decision. They are a win in terms of minimizing behavior errors. But people have argued in BH for a while that TD funds aren't good in taxable. As the wiki https://www.bogleheads.org/wiki/Target_date_funds says
Tax inefficiency of target date retirements funds
Target date retirement funds include all assets in one fund and do not allow a tax-efficient fund placement of each individual asset class.

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.

Note: Taxes considerations are secondary to selecting the desired asset allocation.
I'd also note that they have a very slightly higher ER than the component funds. Again, not normally the worst thing in the world. But if I were to get TD/Balanced funds I'd personally not do it in taxable.

[edit - removed wrong statement about TDF and foreign tax credit]
Last edited by Da5id on Fri Jan 21, 2022 4:19 pm, edited 1 time in total.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by AlphaLess »

I read the whole thing.

Oh, boy.

Sorry to hear that, OP.

Best of luck figuring it out, but it is not fun to pay taxes when you don't want to.

Yea, who said anything in investing is easy.

Nothing is. That is why a lot of people learn expensive lessons.
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Re: Target date funds ... so much for "set and forget"

Post by AlphaLess »

Jason Zweig wrote: Fri Jan 21, 2022 11:10 am I wrote a column about this in today's WSJ:

https://www.wsj.com/articles/vanguard-t ... 1642781228

Jason Zweig
Great article.
Great advice!
Thank you for writing.

Unfortunately, advice does not help in hindsight.

Never been a fan of target date retirement funds.
Not in taxable, not in tax-sheltered, not anywhere.

Target date retirement fund is a type of actively managed fund, even though it may only hold passive funds.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by WapelloHawk »

Da5id wrote: Fri Jan 21, 2022 3:34 pm
WapelloHawk wrote: Fri Jan 21, 2022 3:24 pm I started investing in the 2055 target date fund for my kids back in 2015. The cap gains have been next to nothing for years. To all the Monday morning QB's who say we should have known better than to invest in a taxable account, give me a break. As explained in the article and by my relationship manager back in early Dec, this was a one-time event due to a decision Vanguard made, it had nothing to do with the glide path.
TD funds aren't great in a taxable account separate from Vanguard's brutal decision. They are a win in terms of minimizing behavior errors. But people have argued in BH for a while that TD funds aren't good in taxable. As the wiki https://www.bogleheads.org/wiki/Target_date_funds says
Tax inefficiency of target date retirements funds
Target date retirement funds include all assets in one fund and do not allow a tax-efficient fund placement of each individual asset class.

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.

Note: Taxes considerations are secondary to selecting the desired asset allocation.
I'd also note that they lose the ability to get the foreign tax credit and have a very slightly higher ER than the component funds. Again, not normally the worst thing in the world. But if I were to get TD/Balanced funds I'd personally not do it in taxable.
OK Monday Morning QB, thanks for the advice. The 2055 fund has 10% bonds. I have paid the taxes on it for 6 years. Next to nothing.

Also, the Foreign Tax credit is not lost. Vanguard puts it on the 1099 no different than they do if you own the Total Intl fund outright.
Last edited by WapelloHawk on Fri Jan 21, 2022 3:48 pm, edited 1 time in total.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

WapelloHawk wrote: Fri Jan 21, 2022 3:43 pm OK Monday Morning QB, thanks for the advice. The 2055 fund has 10% bonds. I have paid the taxes on it for 6 years. Next to nothing.
Easy, just trying to say that for the long term it isn't ideal. In particular, you can't change out of it once it *does* have more bonds easily as you will probably have large capital gains at that point. So the time to figure that out is earlier rather than later IMO.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by WapelloHawk »

Da5id wrote: Fri Jan 21, 2022 3:46 pm
WapelloHawk wrote: Fri Jan 21, 2022 3:43 pm OK Monday Morning QB, thanks for the advice. The 2055 fund has 10% bonds. I have paid the taxes on it for 6 years. Next to nothing.
Easy, just trying to say that for the long term it isn't ideal. In particular, you can't change out of it once it *does* have more bonds easily as you will probably have large capital gains at that point. So the time to figure that out is earlier rather than later IMO.
Also, the Foreign Tax credit is not lost. It is on the 1099 no different than if you own the Total Intl fund outright.

None of the Target Date funds have historically had anywhere near the cap gains that they had in 2021.
Last edited by WapelloHawk on Fri Jan 21, 2022 3:53 pm, edited 1 time in total.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Ray_McKigney »

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

Post by alex_686 »

bowest wrote: Fri Jan 21, 2022 3:27 pm Any reason Vanguard could not have worked with plans to redeem assets in kind given how badly taxable would be screwed (surely there's some CYA language to this effect in prospectus saying it was an option as hedge against forced liquidation or catastrophic market movements) and then accept back in the institutional fund? Doesn't seem much more onerous than having to execute roundtrip sales and repurchases as the assets moved.
I alluded to this upstream. It is kind of onerous.

There are some Vanguard funds that do this regularly. I kind of bet that the retirement plans on the other side are big institutions who have the sophistication to handle this.

When I worked at a mid-sized fund sponsor I had to deal with this twice in 10 years. We had dress rehearsals for a week ahead of time to make sure we didn't boff any one of the 100 details that we never every had to deal with on a daily basis. Honestly, it would have been much easier just the sell one side in the market and buy it again on the other. Yes, we would have incurred trading costs but that could have been handled. A driver was to avoid capital gains.

I am not surprised that smaller retirement plans would not choose this option.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

Ray_McKigney wrote: Fri Jan 21, 2022 3:51 pm With bonds rates this low, an investor might read the wiki and conclude that TDFs in taxable are "efficient enough" for them.

This recent event is significant, imo. It changes my position on TDFs in taxable from "not ideal, but maybe acceptable" to "no freaking way."
That is fair. But consider that if interest rates are much higher X years down the line you may be locked into a TDF or face a large capital gain.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Da5id »

WapelloHawk wrote: Fri Jan 21, 2022 3:50 pm
Da5id wrote: Fri Jan 21, 2022 3:46 pm
WapelloHawk wrote: Fri Jan 21, 2022 3:43 pm OK Monday Morning QB, thanks for the advice. The 2055 fund has 10% bonds. I have paid the taxes on it for 6 years. Next to nothing.
Easy, just trying to say that for the long term it isn't ideal. In particular, you can't change out of it once it *does* have more bonds easily as you will probably have large capital gains at that point. So the time to figure that out is earlier rather than later IMO.
Also, the Foreign Tax credit is not lost. It is on the 1099 no different than if you own the Total Intl fund outright.

None of the Target Date funds have historically had anywhere near the cap gains that they had in 2021.
I'm not saying that Vanguard didn't blindside, you they totally did.

And I was confused on Foreign Tax Credit. I thought I remembered that a fund with < 50% international didn't get the credit, clearly I was incorrect there.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by longinvest »

I'm surprised to see Vanguard's mistake used as a reason to argue against using target date funds in taxable accounts. The tax consequences wouldn't have been different if Vanguard had made the same mistake with a single-asset index fund.

What I'm saying is that the tax cost is due to Vanguard's mistake; the cost isn't due to the all-in-one nature of the affected funds.

We've seen other mistakes in the past. In 2002, Vanguard's Total Bond Market Index Fund (then VBMFX fund, now VBTLX fund and BND ETF) failed to track its index by a significant -2% error. It was a due to a management mistake (sampling strategy). Vanguard has since then improved its sampling strategy to (hopefully) avoid such big tracking errors in the future.

Claiming that target date funds should be avoided in taxable accounts because Vanguard made a mistake in 2021 is similar to claiming that one shouldn't invest into bond index funds because of potential tracking errors; that one should, instead, build one's own bond index portfolio using individual securities bought in proportion of market weights. (Just imagine buying and tracking over 10,000 individual bonds! It would be more than a full-time job.)

Let's be clear. The only way to avoid the tax consequences of manager mistakes in a taxable account is to avoid owning any mutual fund or ETF in it, regardless of whether the fund or ETF is indexed or actively managed. This would be impractical and, more importantly, it's based on the flawed idea that individual investors would make fewer mistakes than Vanguard's fund managers. The managers of other fund providers make mistakes, too. Such is life: mistakes happen.

What happened in 2021 is unfortunate. In all likelyhood, all-in-one target date ETFs (instead of target date mutual funds) would have lessened (or possibly avoided) the undesirable tax consequence of Vanguard's mistake. Maybe U.S. investors could pressure Vanguard to start offering ETF versions of its all-in-one Target Date Funds and LifeStrategy Funds? Vanguard already provides such LifeStrategy ETFs in the UK and Asset Allocation ETFs in Canada.

This mistake doesn't change my opinion. I think that low-cost globally-diversified all-in-one index funds and ETFs significantly simplify investing. They help sidestep a long series of behavioral pitfalls and are good enough to be held in taxable accounts once tax-advantaged accounts are full. Here's thread about it: The One-Fund Portfolio as a default suggestion.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Oicuryy »

Makefile wrote: Fri Jan 21, 2022 12:39 pm Sad thing is the whole thing was all for nought as the Institutional and Admiral Target Retirement funds are supposed to merge next month. Presumably, had the $100 million/$5 million thing not happened first and they just merged in the first place, the distribution may not have happened...
Mr. Zweig should have asked Vanguard about this. Vanguard is adding insult to injury.

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Re: Wall Street Journal article about Vanguard distributions

Post by sycamore »

Makefile wrote: Fri Jan 21, 2022 12:39 pm ... the Institutional and Admiral Target Retirement funds are supposed to merge next month...
Vanguard sure has a lot of different funds, share classes, trusts, and series of funds, etc. But they're actually merging their Institutional TR mutual funds with the regular retail TR funds, which are Investor share class (not Admiral, Captain, Swabbie, Trust, Trust Plus, Trust Select, Trust Super Duper, etc.). Presumably the surviving share class will be Investor.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by lazynovice »

The question to me is whether I own any mutual funds at Vanguard or elsewhere that DON’T have an institutional share class. Will the fund provider open an institutional share class that draws plan sponsors to move their funds out of my fund resulting in a tax bill for me. And if I do, what can I do about it?
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by sycamore »

lazynovice wrote: Fri Jan 21, 2022 7:40 pm The question to me is whether I own any mutual funds at Vanguard or elsewhere that DON’T have an institutional share class. Will the fund provider open an institutional share class that draws plan sponsors to move their funds out of my fund resulting in a tax bill for me. And if I do, what can I do about it?
This could be a rabbit hole.

Imagine "enough" employers get tired of their current 401k fund choices and swap from fund X to a different fund family. Fund manager X has to sell lots of assets to meet the redemption requests, with the remaining shareholders stuck with the cap gains distributions. Sure, to have any significant effect either X would have to be small asset fund to begin with, or there'd have to be a lot of redemptions.

Things like this and your scenario are beyond your control. Maybe stick with single asset funds that already have very very low ERs to begin with, so it's less likely for an new share class to tempt sponsors to switch.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by Fernkiller »

Seems to me this is a problem with all mutual funds: you don't have control over the realization of capital gains. The issue with the target fund is somewhat of an anomaly. I was under the impression that, in general, index funds have less of a problem than others.
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Re: Wall Street Journal article about Vanguard distributions

Post by vineviz »

Jason Zweig wrote: Fri Jan 21, 2022 1:20 pm
That is correct. A spokeswoman for Vanguard confirmed to me that a major factor contributing to the unusually large capital-gains distribution in 2021 was the migration of corporate plans to the Institutional versions of the Target Retirement funds. Note that these are not a share class within the same family, but rather a separate series of funds. Therefore, the corporate plans couldn't convert their holdings, but rather had to sell them, in order to be able to move into the Institutional versions. As Morningstar's Jeff Ptak noted on Twitter today , the outflows from the regular Target Retirement funds and the inflows into the Institutional versions are almost mirror images in 2021.
I hope that this thread will get resurfaced the next time we see a "mutual funds are better than ETFs" campaign.

The most serious flaw in the open end mutual fund design is the fact that buy-and-hold investors tend to get saddled with damage inflicted by more active investors. In 2021 it was capital gains distributions and in 2020 it was a liquidity subsidy in bond funds during the COVID drawdown. These episodes have historically been unusual, but there's a possibility that they will become more common as market share shifts from open end funds to ETFs.
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Re: Target date funds ... so much for "set and forget" [and WSJ article]

Post by lazynovice »

sycamore wrote: Fri Jan 21, 2022 7:56 pm
lazynovice wrote: Fri Jan 21, 2022 7:40 pm The question to me is whether I own any mutual funds at Vanguard or elsewhere that DON’T have an institutional share class. Will the fund provider open an institutional share class that draws plan sponsors to move their funds out of my fund resulting in a tax bill for me. And if I do, what can I do about it?
This could be a rabbit hole.

Imagine "enough" employers get tired of their current 401k fund choices and swap from fund X to a different fund family. Fund manager X has to sell lots of assets to meet the redemption requests, with the remaining shareholders stuck with the cap gains distributions. Sure, to have any significant effect either X would have to be small asset fund to begin with, or there'd have to be a lot of redemptions.

Things like this and your scenario are beyond your control. Maybe stick with single asset funds that already have very very low ERs to begin with, so it's less likely for an new share class to tempt sponsors to switch.
That’s true. The fund I am thinking of that I am unsure if it has an institutional class is FSKAX. It’s offered in 401(k) and to retail. Both instances have a .015% ER. It’s doubtful Fidelity would offer a 401(k) version for less than .015%.
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