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

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

Post by dbr »

mikejuss wrote: Wed Jan 05, 2022 10:48 am
lasater wrote: Wed Jan 05, 2022 10:45 am
mikejuss wrote: Wed Jan 05, 2022 10:38 am
dbr wrote: Mon Jan 03, 2022 7:45 pm
mikejuss wrote: Mon Jan 03, 2022 7:20 pm
Does selling stocks to buy bonds trigger inordinate capital-gains distributions? I didn't think it worked that way. Wouldn't a person have more capital-gains distributions if he held onto his stocks instead of buying bonds?
Several thinks confounded here. A person holding stocks and bonds doesn't have capital gains distributions. If that person sells appreciated stocks to rebalance his holding or even just to withdraw money he would realize a capital gain, and that would be taxed. Capital gains realized by an individual selling things and capital gains distributions issued by fund are two different things.
I follow what you're saying, but now have a question: what the heck is a capital-gains distribution?
@mikejuss I had the same question and reaction a couple days ago :) This page on the wiki is a good one: https://www.bogleheads.org/wiki/Capital ... stribution

My laypersons understanding is that when a fund realizes capital gains through selling appreciated assets, they are obliged to pass those gains on pro-rata to investors in the fund by end of the calendar year. These gains are then taxable to the investor, even though they didn't take any explicit action to generate them (other than choosing to hold that particular fund.)
I see--thanks. I'd heard of dividend distributions but not capital-gains distributions. I will keep an eye out for them in my portfolio.
It's more than that. The OP in this thread got where he got by not looking out for them before he put something in his portfolio. This is complicated by the fact that a recent history of little distribution does not mean there can't be a big one, nor does a large distribution one year mean that will happen every year. In general though, not putting TD funds in taxable accounts is probably prudent.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

dbr wrote: Wed Jan 05, 2022 10:56 am It's more than that. The OP in this thread got where he got by not looking out for them before he put something in his portfolio. This is complicated by the fact that a recent history of little distribution does not mean there can't be a big one, nor does a large distribution one year mean that will happen every year. In general though, not putting TD funds in taxable accounts is probably prudent.
I don't understand your conclusion: presumably, the OP wants to hold stocks and bonds--whether inside or outside of a target-date fund. How does holding them in a target-date fund result in higher capital-gains distributions? I'm clearly missing something here.
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retiredjg
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Re: Target date funds ... so much for "set and forget"

Post by retiredjg »

lasater, welcome to the forum. :happy

This is pretty shocking and I'm sure you are disappointed as well as being shocked. However, had you gone with an "advisor", chances are you would have had a taxable account that was both tax-inefficient (although spread out over the years) and high cost!

In retrospect, it was not your best choice to hold a target fund in taxable. However, it is done and not a fatal mistake by any means.

If the shares you have don't have a lot of unrealized capital gains, I'd dump it (all this year or over 2 years) and move to a taxable account that is tax-efficient. Holding a total stock index and a total international index in taxable is always a good choice. If you can old all your bonds in a 401k or similar, that can be a good approach.

However, in your high tax state, another good choice is to put at least some of the bonds into the NY tax-exempt fund and a short term national tax-exempt fund (half and half). This would fit nicely with your other accounts and the taxable account is the only one to keep balanced.

If you are a charitable giver and you still have some shares with high gains, consider if you can donate those to charity instead of making cash donations. You get rid of the gains but pay no tax. Consider a donor advised fund for ease of donation.
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Re: Target date funds ... so much for "set and forget"

Post by Dude2 »

The issue is that in a fund of funds that somebody else runs, you have no control. On the other hand, you can hold stock funds and direct CDs (for example) all day long in taxable and do whatever makes the most sense for you.

Sorry to hear some folks got burned by holding TD funds in taxable. VG seems to have done all this for the greater good, i.e. they changed around the component parts of their funds in an effort to move toward lower expenses. Probably in their minds nobody holds these things in taxable. It's a lesson learned with hindsight 20-20.
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dbr
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Re: Target date funds ... so much for "set and forget"

Post by dbr »

mikejuss wrote: Wed Jan 05, 2022 11:01 am
dbr wrote: Wed Jan 05, 2022 10:56 am It's more than that. The OP in this thread got where he got by not looking out for them before he put something in his portfolio. This is complicated by the fact that a recent history of little distribution does not mean there can't be a big one, nor does a large distribution one year mean that will happen every year. In general though, not putting TD funds in taxable accounts is probably prudent.
I don't understand your conclusion: presumably, the OP wants to hold stocks and bonds--whether inside or outside of a target-date fund. How does holding them in a target-date fund result in higher capital-gains distributions? I'm clearly missing something here.
There is some discussion of that here: viewtopic.php?t=362699
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Re: Target date funds ... so much for "set and forget"

Post by livesoft »

lasater wrote: Wed Jan 05, 2022 10:22 am Thanks @livesoft. When you suggest selling TDF in taxable could be "problematic", do you mean from a capital gains tax perspective, or is there a separate issue I'm not seeing?
I meant capital gains tax perspective.
livesoft wrote: Mon Jan 03, 2022 10:40 am a. Do not reinvest distribution in your taxable.. If you reinvested the recent distribution consider selling just those shares before they go up or down in value. Instead use the distribution money to buy more tax-efficient investments.

b. In your situation, if you need bonds in your taxable account, then consider tax-exempt muni bonds, either National tax-exempt or Triple-NY-tax-exempt.
Given everything I've learned in this thread, I'm going to shift towards holding stock / bond mutual funds or ETFs directly versus through a TD fund. Obviously there are limits to how much VFORX it makes sense to sell to accelerate this shift, but the recent distribution reduced my basis considerably, so I can sell some relatively recent lots without incurring significant gains.
Maybe it is semantics, but I am pretty sure your basis is not reduced. If you reinvested you have additional shares with their own basis. Your unrealized capital gains are reduced. If can still do so, then I suggest you make sure your Cost Basis Method is set to Specific Identification.
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retiredjg
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Re: Target date funds ... so much for "set and forget"

Post by retiredjg »

I'm stumbling over the use of the word basis as well. To me, basis is "already taxed money". So your basis is increased rather than decreased after this little surprise. It's your unrealized gains that should be reduced.
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Re: Target date funds ... so much for "set and forget"

Post by cas »

mikejuss wrote: Wed Jan 05, 2022 11:01 am I don't understand your conclusion: presumably, the OP wants to hold stocks and bonds--whether inside or outside of a target-date fund. How does holding them in a target-date fund result in higher capital-gains distributions? I'm clearly missing something here.
One of the main 4 description points on the Vanguard Target Retirement description page is
  • Professionally managed asset mix
In theory, investors who buy funds-of-funds, such as target date funds, buy them because they *want* this layer of professional management.

(In practice, who knows. Given that, since 2006 law changes, employees are opted in to employer retirement plans, with target date funds usually the legally approved default investment, maybe just inertia/uncertainty/familiarity leads some investors to continue on that path in their other accounts as well. However, unlike for 401(k)/403(b) where they are opted-in by default, the investor *does* have to sign that they read and understood the prospectus before they buy a fund-of-funds in other accounts.)

In any case ... this layer of professional management comes with a side effect:

It means that funds-of-funds, like Vanguard Target Retirement, generally have a type of active management built into them by design and described in the prospectus. Even if the component funds are index funds, the manager has been hired to, based on their professional judgement, do things, at irregular intervals, like enforce a glide path, change the proportions of the component funds, change the glide path, or change out/add/delete one fund for another.

These active decisions may cause capital gains to be realized inside the fund-of-funds which must be passed out to the investors in the fund-of-funds.

None of this matters inside tax-advantaged accounts.

However, in a taxable account, the timing of this realization of gains is not in the control of the individual tax-payer and may potentially happen in a very inconvenient tax year.

This is not funds-of-funds doing something wrong. It is just them doing what they were designed to do.

By contrast, when an investor holds the component funds directly, it has the downside that they need to make their own decisions on what funds to hold and when to buy/sell/rebalance. But they *can* control the timing of any changes to have the least tax impact for their particular situation.
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Re: Target date funds ... so much for "set and forget"

Post by Peripatetic Investor »

lasater wrote: Wed Jan 05, 2022 10:30 am
Peripatetic Investor wrote: Mon Jan 03, 2022 11:50 am I would move cash dividends (and any stock with low BIG) to VTI, VXUS, and, for bond portion of your portfolio, munis and iBonds. I believe Vanguard has a NY-specific tax exempt fund you might want to consider. If you want exposure to taxable bonds, they should be moved into tax-deferred accounts.
Thanks. This all makes sense. I think the fund you're referencing is Vanguard New York Long-Term Tax-Exempt Fund (VNYTX).

One question, should I expect lower returns from a tax-exempt bonds like VNYTX or VWAHX, versus taxable bonds like VBFMX? (i.e., are the tax advantages already "priced in"?)

(Also, what does "BIG" stand for? I interpreted "stock with low BIG" as stock holdings that aren't carrying significant gains since purchase.)
Yes, you should expect lower return in a muni fund, so whether it makes sense depends on your tax bracket. If you're in the highest marginal tax rate, it's a no-brainer over Treasuries (though obviously slightly more risky). For my Treasuries, I like I-Bonds and TIPS, because of the inflation-protection (I-Bonds are also nice in that the accrued interest is not taxable until the bond is redeemed; so they are effectively tax-deferred, like a bond held in an IRA). Sorry, "BIG" is "built-in gain" -- so, appreciated shares.
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mikejuss
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

cas wrote: Wed Jan 05, 2022 11:34 am
mikejuss wrote: Wed Jan 05, 2022 11:01 am I don't understand your conclusion: presumably, the OP wants to hold stocks and bonds--whether inside or outside of a target-date fund. How does holding them in a target-date fund result in higher capital-gains distributions? I'm clearly missing something here.
One of the main 4 description points on the Vanguard Target Retirement description page is
  • Professionally managed asset mix
In theory, investors who buy funds-of-funds, such as target date funds, buy them because they *want* this layer of professional management.

(In practice, who knows. Given that, since 2006 law changes, employees are opted in to employer retirement plans, with target date funds usually the legally approved default investment, maybe just inertia/uncertainty/familiarity leads some investors to continue on that path in their other accounts as well. However, unlike for 401(k)/403(b) where they are opted-in by default, the investor *does* have to sign that they read and understood the prospectus before they buy a fund-of-funds in other accounts.)

In any case ... this layer of professional management comes with a side effect:

It means that funds-of-funds, like Vanguard Target Retirement, generally have a type of active management built into them by design and described in the prospectus. Even if the component funds are index funds, the manager has been hired to, based on their professional judgement, do things, at irregular intervals, like enforce a glide path, change the proportions of the component funds, change the glide path, or change out/add/delete one fund for another.

These active decisions may cause capital gains to be realized inside the fund-of-funds which must be passed out to the investors in the fund-of-funds.

None of this matters inside tax-advantaged accounts.

However, in a taxable account, the timing of this realization of gains is not in the control of the individual tax-payer and may potentially happen in a very inconvenient tax year.

This is not funds-of-funds doing something wrong. It is just them doing what they were designed to do.

By contrast, when an investor holds the component funds directly, it has the downside that they need to make their own decisions on what funds to hold and when to buy/sell/rebalance. But they *can* control the timing of any changes to have the least tax impact for their particular situation.
Thanks for this context, but, per the OP, we're talking about a 1-year period during which $1 million of capital-gains distributions were generated.

Vanguard TDFs are generally composed of VTSAX, VTIAX, VBTLX, and VTABX. Anyone could have held those funds in a taxable account. What kind of active-management strategies inside a TDF would trigger capital-gains distributions district from those seen by a person who simply held the component parts at their preferred asset allocation?
Last edited by mikejuss on Wed Jan 05, 2022 11:45 am, edited 1 time in total.
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dbr
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Re: Target date funds ... so much for "set and forget"

Post by dbr »

mikejuss wrote: Wed Jan 05, 2022 11:43 am

Vanguard TDFs are generally composed of VTSAX, VTIAX, VBTLX, and VTABX. Anyone could have held those funds in a taxable account. What kind of active-management strategies inside a TDF would trigger capital-gains distributions district from those for a person who simply held the component parts at their preferred asset allocation?
There is some discussion of that here: viewtopic.php?t=362699
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Re: Target date funds ... so much for "set and forget"

Post by muffins14 »

lasater wrote: Wed Jan 05, 2022 10:37 am
muffins14 wrote: Mon Jan 03, 2022 1:53 pm You’ve gotten good advice on replicating the fund more tax-efficiently through holding VTI or VUG for US and VXUS (or even better, IXUS) for stocks and NY munis for bonds.

Work toward that with tax loss harvesting and dividend payments.
Thanks Muffins14. I am going to see what reallocations I can make in the short and long term. The reduced basis will help with selling some VFORX at relatively low gains.

Can I ask why you prefer IXUS over VXUS for international stocks?
It should be slightly more tax efficient for someone in a high marginal-rate bracket
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riverant
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Re: Target date funds ... so much for "set and forget"

Post by riverant »

mikejuss wrote: Wed Jan 05, 2022 11:43 am
cas wrote: Wed Jan 05, 2022 11:34 am
mikejuss wrote: Wed Jan 05, 2022 11:01 am I don't understand your conclusion: presumably, the OP wants to hold stocks and bonds--whether inside or outside of a target-date fund. How does holding them in a target-date fund result in higher capital-gains distributions? I'm clearly missing something here.
One of the main 4 description points on the Vanguard Target Retirement description page is
  • Professionally managed asset mix
In theory, investors who buy funds-of-funds, such as target date funds, buy them because they *want* this layer of professional management.

(In practice, who knows. Given that, since 2006 law changes, employees are opted in to employer retirement plans, with target date funds usually the legally approved default investment, maybe just inertia/uncertainty/familiarity leads some investors to continue on that path in their other accounts as well. However, unlike for 401(k)/403(b) where they are opted-in by default, the investor *does* have to sign that they read and understood the prospectus before they buy a fund-of-funds in other accounts.)

In any case ... this layer of professional management comes with a side effect:

It means that funds-of-funds, like Vanguard Target Retirement, generally have a type of active management built into them by design and described in the prospectus. Even if the component funds are index funds, the manager has been hired to, based on their professional judgement, do things, at irregular intervals, like enforce a glide path, change the proportions of the component funds, change the glide path, or change out/add/delete one fund for another.

These active decisions may cause capital gains to be realized inside the fund-of-funds which must be passed out to the investors in the fund-of-funds.

None of this matters inside tax-advantaged accounts.

However, in a taxable account, the timing of this realization of gains is not in the control of the individual tax-payer and may potentially happen in a very inconvenient tax year.

This is not funds-of-funds doing something wrong. It is just them doing what they were designed to do.

By contrast, when an investor holds the component funds directly, it has the downside that they need to make their own decisions on what funds to hold and when to buy/sell/rebalance. But they *can* control the timing of any changes to have the least tax impact for their particular situation.
Thanks for this context, but, per the OP, we're talking about a 1-year period during which $1 million of capital-gains distributions were generated.

Vanguard TDFs are generally composed of VTSAX, VTIAX, VBTLX, and VTABX. Anyone could have held those funds in a taxable account. What kind of active-management strategies inside a TDF would trigger capital-gains distributions district from those seen by a person who simply held the component parts at their preferred asset allocation?
The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
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Re: Target date funds ... so much for "set and forget"

Post by Dude2 »

mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
You can read the links given in several posts above. Essentially they did things like switch out the Total World Bond Index I for the Total World Bond Index II, and they did something like change to the institutional version versus the investor version. Things like that. Had you held the component parts, you would not have had the effects.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

Dude2 wrote: Wed Jan 05, 2022 12:02 pm
mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
You can read the links given in several posts above. Essentially they did things like switch out the Total World Bond Index I for the Total World Bond Index II, and they did something like change to the institutional version versus the investor version. Things like that. Had you held the component parts, you would not have had the effects.
Yes, I read them. The changes you outline are not endemic to TDFs. The OP just happened to put a lot of money into one that had a lot of changes this past year, which, I agree, is a bummer.
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cas
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Re: Target date funds ... so much for "set and forget"

Post by cas »

mikejuss wrote: Wed Jan 05, 2022 11:43 am What kind of active-management strategies inside a TDF would trigger capital-gains distributions district from those seen by a person who simply held the component parts at their preferred asset allocation?
As Dude 2 said above:
Dude2 wrote: Wed Jan 05, 2022 11:07 am Sorry to hear some folks got burned by holding TD funds in taxable. VG seems to have done all this for the greater good, i.e. they changed around the component parts of their funds in an effort to move toward lower expenses. Probably in their minds nobody holds these things in taxable. It's a lesson learned with hindsight 20-20.
(BTW, Fidelity did the same thing in 2019. It was much commented upon in these forums at the time.)

There had been complaints for years that Vanguard Target Retirement funds were too expensive. The Boglehead's wiki even somewhat refers to this ongoing complaint:
Despite the already low expense ratios, Vanguard could theoretically create even cheaper versions. The underlying holdings are presently all investor class but all the funds utilized already have admiral share classes. Admiral class TR funds would theoretically serve individual shareholders with substantial balances. On the other hand, Vanguard incurs substantial costs in creating and maintaining the TR vehicles. These costs are not passed on directly to their shareholders, and the absence of additional share classes could be viewed as a sort of reimbursement. Vanguard does offer institutional target date retirement funds for institutional accounts.
Who knows, it may have even gotten to the point that Vanguard thought that if they *didn't* act to reduce ER, they were going to start losing enough target date assets to competitors that they would encounter a period of ongoing net redemptions, would have to liquidate appreciated assets to meet redemptions, and would have to start making largish ongoing capital gain distributions on an ongoing basis.

As far as the "Probably in their minds nobody holds these things in taxable" comment: That has to do with the Pension Protection Act of 2006, when participation in 401(k)/403(b) become "opt-out" rather than "opt-in" for employees. Target Date funds had been invented before that, but my memory is that they hit the Big Time when employer plans suddenly needed legally approved default investments for all the "opted-in" employees who took no active action to choose investments. I seem to recall all sorts of educational meetings at the time explaining what Target Date funds were and how they had characteristics that made them a good fit for being the default investments for 401(k)s.

I sort of suspect that a lot of people who had 401(k)/403(b) *before* 2006 have it vaguely floating around the back of their minds that target date funds were invented specifically *for* tax-advantaged plans. So putting it in taxable seems like an odd decision to them.

However, I can imagine how that thought might be missing in younger employees, who grew up in a world where they were, without any action on their part, opted-in to 401(k)/403(b) plans and opted-in to target date funds within those plans. This may be something we at Bogleheads need to keep in mind when advising about portfolios.
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Re: Target date funds ... so much for "set and forget"

Post by gblack »

lasater wrote: Mon Jan 03, 2022 10:30 am Hey all,

I've been investing all my taxable and tax-advantaged assets in Vanguard's 2040 target date fund VFORX. I just learned a hard lesson about the tax efficiency of this fund, and am looking for guidance on improving my asset location strategy, and general approach to investing.

By way of background, I didn't start saving for retirement until my early 30s. (... I really wish I could go back in time and give the younger me a stern talking to about compound interest ... not sure he would listen though!!) Around 2011, I finally wised up to long-term investing, and the Bogleheads philosophy resonated with me. A target retirement date fund seemed the easiest way to get started, and I decided to invest in VFORX. I opened my first 401(k) that year and have made the maximum contribution every year since. The total balance in my tax-advantaged accounts at this point is about 260K.

I work in tech, and was fortunate to experience significant equity upside in a startup. In 2020 I realized ~4.8M in net proceeds through a secondary share sale, and decided to take the same approach to managing these funds versus paying a wealth advisor to manage them for me. I invested all the proceeds in VFORX (held in a regular taxable brokerage account.)

As of 12/28/2021, I had a 6.4M balance in this brokerage account, with 1.6M of unrealized LT gains. As as been discussed in several other threads, VFORX and many other Vanguard target date funds made huge capital gains distributions in 2021, and as a result I unexpectedly and undesirably received ~1.0M of capital gains distributions on 12/29/2021, thus creating a huge tax bill for 2021 :-/

I'm pretty annoyed at myself for not being more educated about how to select funds for taxable accounts (and/or choosing a wealth advisor who hopefully would have made smarter decisions), and at Vanguard (...who I think could have done a far better job of educating investors on this issue/risk.)

I live in NYC and already have W-2, STCG and non-qualified dividend income of about 380K, so will hit the 20% bracket on most of the LTCG, as well as paying a further 3.8% NIIT and 8.82% state. All told, the timing of the distribution means I will pay 34% on 1M of LTCG, versus the 10-25% a more intentional strategy would have afforded. I appreciate this story might earn me a song played on the worlds smallest violin, but nonetheless it's hardly smart investing which is why I'm asking for advice :)

One silver lining is that with the reduced basis I have an opportunity to reallocate up to 4M of VFORX held in the brokerage account without incurring much additional LTCG in 2022. I'm now debating between getting a professional to manage my taxable assets, or continuing to manage them myself, probably by creating a three fund portfolio using more tax efficient funds (e.g., VTI for equities).

I'd appreciate any guidance the more experienced Bogleheads out there might have :) Candidly the experience above has dented my confidence in managing my own portfolio.

Thanks!
This situation stinks, although I'm not sure it's an argument against target date funds in taxable. I think it argues for getting some expert input when you earn a huge windfall.

Maybe you can take solace in the reality that you were gonna have to pay taxes on the money at some point -- and as you mentioned, now you have a higher basis. Worse things could have happened - the market could've tanked!
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Re: Target date funds ... so much for "set and forget"

Post by Ricola »

mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
And there we are, back to market timing. :)
Last edited by Ricola on Wed Jan 05, 2022 1:43 pm, edited 1 time in total.
mikejuss
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

Ricola wrote: Wed Jan 05, 2022 1:28 pm
mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
And there we are, back to market timing. :)
No, maintaining a solid asset allocation is the opposite of market timing.
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Ricola
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Re: Target date funds ... so much for "set and forget"

Post by Ricola »

mikejuss wrote: Wed Jan 05, 2022 1:31 pm
Ricola wrote: Wed Jan 05, 2022 1:28 pm
mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
And there we are, back to market timing. :)
No, maintaining a solid asset allocation is the opposite of market timing.
Agree, but choosing to drift and avoid maintaining asset allocation...or until when? Appears to be timing.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

Ricola wrote: Wed Jan 05, 2022 1:47 pm
mikejuss wrote: Wed Jan 05, 2022 1:31 pm
Ricola wrote: Wed Jan 05, 2022 1:28 pm
mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
And there we are, back to market timing. :)
No, maintaining a solid asset allocation is the opposite of market timing.
Agree, but choosing to drift and avoid maintaining asset allocation...or until when? Appears to be timing.
Passive timing--sure.
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Re: Target date funds ... so much for "set and forget"

Post by PowderDay9 »

The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

PowderDay9 wrote: Wed Jan 05, 2022 1:55 pm The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
I never knew that the auto-balancing that happens within a TDF triggers capital-gains-tax events (in a taxable account). But I learn something new on this board every day.
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Re: Target date funds ... so much for "set and forget"

Post by Ricola »

mikejuss wrote: Wed Jan 05, 2022 1:58 pm
PowderDay9 wrote: Wed Jan 05, 2022 1:55 pm The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
I never knew that the auto-balancing that happens within a TDF triggers capital-gains-tax events (in a taxable account). But I learn something new on this board every day.
If it needs to be done, then Auto or Manual seems the same to me.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

Ricola wrote: Wed Jan 05, 2022 2:04 pm
mikejuss wrote: Wed Jan 05, 2022 1:58 pm
PowderDay9 wrote: Wed Jan 05, 2022 1:55 pm The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
I never knew that the auto-balancing that happens within a TDF triggers capital-gains-tax events (in a taxable account). But I learn something new on this board every day.
If it needs to be done, then Auto or Manual seems the same to me.
In fact, the best way to rebalance--ie, without incurring any capital gains--is to put new money toward whatever asset is lagging.
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Re: Target date funds ... so much for "set and forget"

Post by PowderDay9 »

mikejuss wrote: Wed Jan 05, 2022 2:05 pm
Ricola wrote: Wed Jan 05, 2022 2:04 pm
mikejuss wrote: Wed Jan 05, 2022 1:58 pm
PowderDay9 wrote: Wed Jan 05, 2022 1:55 pm The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
I never knew that the auto-balancing that happens within a TDF triggers capital-gains-tax events (in a taxable account). But I learn something new on this board every day.
If it needs to be done, then Auto or Manual seems the same to me.
In fact, the best way to rebalance--ie, without incurring any capital gains--is to put new money toward whatever asset is lagging.
I do this and use tax protected accounts to rebalance. Manually rebalancing gives you a lot more options and you can manage your tax situation much better. For example, you don't have to realize 5 years of gains in 1 year.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

PowderDay9 wrote: Wed Jan 05, 2022 2:20 pm
mikejuss wrote: Wed Jan 05, 2022 2:05 pm
Ricola wrote: Wed Jan 05, 2022 2:04 pm
mikejuss wrote: Wed Jan 05, 2022 1:58 pm
PowderDay9 wrote: Wed Jan 05, 2022 1:55 pm The good news is the OP realized the mistake and can begin to move away from target date funds in a taxable account. I imagine this situation happens to some people and they don't even realize how much extra they could have saved in taxes!
I never knew that the auto-balancing that happens within a TDF triggers capital-gains-tax events (in a taxable account). But I learn something new on this board every day.
If it needs to be done, then Auto or Manual seems the same to me.
In fact, the best way to rebalance--ie, without incurring any capital gains--is to put new money toward whatever asset is lagging.
I do this and use tax protected accounts to rebalance. Manually rebalancing gives you a lot more options and you can manage your tax situation much better. For example, you don't have to realize 5 years of gains in 1 year.
+1. As long as one is in the stage of contributing regularly to a taxable account, manual rebalancing through new buys is so much better than selling one asset and buying another. In fact, I've never done the latter.
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Re: Target date funds ... so much for "set and forget"

Post by Ricola »

[/quote]
+1. As long as one is in the stage of contributing regularly to a taxable account, manual rebalancing through new buys is so much better than selling one asset and buying another. In fact, I've never done the latter.
[/quote]
You must mean small scale and small changes. Say if you have $1M in stocks and it gains 20% most likely you won't have $200K sitting around to add to bonds to maintain a 50/50 allocation. To maintain asset allocation you will need to sell and buy.
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Re: Target date funds ... so much for "set and forget"

Post by KyleAAA »

With a taxable account that large and since you are still earning W2 income, you would almost certainly be much better off owning VUG in taxable instead of VTI. You can balance it out with value index in your tax deferred accounts if you want.
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Re: Target date funds ... so much for "set and forget"

Post by mikejuss »

Ricola wrote: Wed Jan 05, 2022 2:31 pm
+1. As long as one is in the stage of contributing regularly to a taxable account, manual rebalancing through new buys is so much better than selling one asset and buying another. In fact, I've never done the latter.
[/quote]
You must mean small scale and small changes. Say if you have $1M in stocks and it gains 20% most likely you won't have $200K sitting around to add to bonds to maintain a 50/50 allocation. To maintain asset allocation you will need to sell and buy.
[/quote]

There are ways around that, including adjusting the asset allocations of one's qualified accounts (401[k], IRA, etc.). But yes--sometimes, when the upward swing is very significant, buying and selling is unavoidable.
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Re: Target date funds ... so much for "set and forget"

Post by lasater »

retiredjg wrote: Wed Jan 05, 2022 11:30 am I'm stumbling over the use of the word basis as well. To me, basis is "already taxed money". So your basis is increased rather than decreased after this little surprise. It's your unrealized gains that should be reduced.
Ah, you're right, thanks to you and livesoft for pointing this out. I mistakenly used the phrase "reduced basis" several times earlier in this thread. The capital gains distribution did not affect my basis in existing lots. It was actually the fund NAV that changed (from 50.77 to 42.07 on 12/28), thus reducing my unrealized gains in those lots.
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Re: Target date funds ... so much for "set and forget"

Post by riverant »

mikejuss wrote: Wed Jan 05, 2022 1:31 pm
Ricola wrote: Wed Jan 05, 2022 1:28 pm
mikejuss wrote: Wed Jan 05, 2022 11:58 am
TJat wrote: Wed Jan 05, 2022 11:56 am The fund likely is forced to rebalance to maintain their glide path. With equities going up 20%+ and bonds sucking wind, there was probably a lot of equity to bond rebalancing. Haven’t done the math myself, but I’d expect greater than average capital gains in 2021.
Gotcha. The OP would have had to do the same thing if he held the individual funds and were sticking to an asset allocation this year. But maybe he would have allowed a good deal of drift and avoided these taxes.
And there we are, back to market timing. :)
No, maintaining a solid asset allocation is the opposite of market timing.
The better approach would be to stick with VTI in the taxable accounts and maintain whatever bond allocation he wants in tax deferred accounts. Rebalance whenever in ways that avoid selling anything in taxable. Target date funds really only work well for people that only invest in a 401k plan and don’t want to think about anything.
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Re: Target date funds ... so much for "set and forget"

Post by SeekingZappa »

lasater wrote: Wed Jan 05, 2022 10:42 am
SeekingZappa wrote: Mon Jan 03, 2022 8:35 pm I suspect that the disproportionate distributions with the target date funds are the culmination of a changing glide path in combination with large stock market gains an annual distribution schedule. They had to sell off more stocks to hit the new allocation targets and it all showed up at once. Ballpark, the 2040 is about a 50/50 blend of LSG and LSMG which don't have the shifting allocations and pay out semi-annually. That's not to say that they couldn't also have larger than expected distributions when they hit a rebalancing point.
What are LSG and LSMG in this context? This is the composition published for VFORX as of 11/30

Vanguard Total Stock Market Index Fund Investor Shares 48.70%
Vanguard Total International Stock Index Fund Investor Shares 32.00%
Vanguard Total Bond Market II Index Fund Investor Shares** 13.20%
Vanguard Total International Bond Index Fund Investor Shares 1 6.10%
Vanguard Total International Bond II Index Fund 0.00%
Sorry, meant Life Strategy Growth and Life Strategy Moderate Growth. A blend of the 2 would give a similar fund allocation as he 2040, but would have had far less in distributions (per the VG site). Was theorizing on the reasons for the difference given that they are funds of funds as well. We've since learned that VG does this on a 5 year schedule, which would be consistent with the changing glide path (allocation) part of the theory.
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Re: Target date funds ... so much for "set and forget"

Post by eye.surgeon »

You're looking at the glass half empty. You got great returns on your target date fund. Take the gains and pay the taxes on it with a smile. Would you rather they lost money and you owed no taxes? Don't let the tax tail wag the dog.
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Re: Target date funds ... so much for "set and forget"

Post by Peculiar_Investor »

Heads up, this topic was mentioned today by Jason Zweig in The Huge Tax Bills That Came Out of Nowhere At Vanguard - WSJ.
Jason Zweig wrote:Fury erupted on Bogleheads.org, a website popular among Vanguard investors.

One investor posted there: “I think I’m screwed by Vanguard resulting in an enormous tax bill…. I feel that Vanguard guided me down this path which is frustrating.”

In the Bogleheads area on Reddit, another online forum, an investor posting as “Sitting-Hawk” said he received about $550,000 in distributions in Vanguard’s Target Retirement 2035 fund. So he owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000. “HOW,” he asked in capital letters, “COULD VANGUARD LET THIS HAPPEN??”
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Wall Street Journal article about Vanguard distributions

Post by LK2012 »

[Thread merged into here --admin LadyGeek]

FYI - WSJ Article with some background on how large 2021 Vanguard Target Retirement Fund distributions arose.

The Huge Tax Bills That Came Out of Nowhere At Vanguard. A change that benefited big clients left little ones holding the bag

The WSJ posted this article this morning explaining what led to the large distributions from some of Vanguard's funds, particularly the Target Retirement Funds.

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."

This left individuals unlucky enough to have these funds in taxable accounts holding a big tax bill. There is discussion about how disappointed some were that Vanguard did not warn or advise investors that these funds were not ideal for taxable accounts.

https://www.wsj.com/articles/vanguard-t ... eatst_pos4
Last edited by LK2012 on Fri Jan 21, 2022 10:49 am, edited 2 times in total.
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Re: Wall Street Journal article about Vanguard distributions

Post by Geologist »

Forum policy requests that you "refrain from posting naked links - all links should include an explanation or excerpt unless its meaning is clear from the context".

Could you please include a summary? This is particularly true if there is a paywall on the article.
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Re: Target date funds ... so much for "set and forget"

Post by dbr »

Peculiar_Investor wrote: Fri Jan 21, 2022 10:26 am Heads up, this topic was mentioned today by Jason Zweig in The Huge Tax Bills That Came Out of Nowhere At Vanguard - WSJ.
Jason Zweig wrote:Fury erupted on Bogleheads.org, a website popular among Vanguard investors.

One investor posted there: “I think I’m screwed by Vanguard resulting in an enormous tax bill…. I feel that Vanguard guided me down this path which is frustrating.”

In the Bogleheads area on Reddit, another online forum, an investor posting as “Sitting-Hawk” said he received about $550,000 in distributions in Vanguard’s Target Retirement 2035 fund. So he owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000. “HOW,” he asked in capital letters, “COULD VANGUARD LET THIS HAPPEN??”
From that article"

"That’s a shame, says Eric Johnson, a marketing professor at Columbia Business School and author of the book “The Elements of Choice.” When an investor in a taxable account seeks to buy a fund that might not belong there, he says, a dialogue box could pop up saying something like: “This may not be the best home for your taxable dollars. Before you trade, click here to learn more.” That would link to more-suitable choices."

There is no such pop-up here at BH when people recommend balanced funds in taxable accounts.
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Re: Wall Street Journal article about Vanguard distributions

Post by Peculiar_Investor »

It references the discussion in the topic Target date funds ... so much for "set and forget".
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Re: Wall Street Journal article about Vanguard distributions

Post by LK2012 »

Geologist wrote: Fri Jan 21, 2022 10:30 am Forum policy requests that you "refrain from posting naked links - all links should include an explanation or excerpt unless its meaning is clear from the context".

Could you please include a summary? This is particularly true if there is a paywall on the article.
Thank you for the info, I've added a summary to the original post.
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Re: Wall Street Journal article about Vanguard distributions

Post by mervinj7 »

LK2012 wrote: Fri Jan 21, 2022 10:38 am
Geologist wrote: Fri Jan 21, 2022 10:30 am Forum policy requests that you "refrain from posting naked links - all links should include an explanation or excerpt unless its meaning is clear from the context".

Could you please include a summary? This is particularly true if there is a paywall on the article.
Thank you for the info, I've added a summary to the original post.
Thanks for posting this. Hopefully, posters will be more hesitant now to blindly recommending Target date funds for taxable accounts in the name of simplicity.
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Re: Wall Street Journal article about Vanguard distributions

Post by Stinky »

Geologist wrote: Fri Jan 21, 2022 10:30 am Forum policy requests that you "refrain from posting naked links - all links should include an explanation or excerpt unless its meaning is clear from the context".

Could you please include a summary? This is particularly true if there is a paywall on the article.
The title of the article is:

“The Huge Tax Bills That Came Out of Nowhere at Vanguard -
A Change that benefitted big clients left little ones holding the bag”

The problem was that many of Vanguard‘s target date funds had huge capital gains distributions in 2021, which whacked folks holding the funds in taxable accounts. This has been previously discussed on the Forum.

The reason for the distributions was that Vanguard reduced the minimum amount for its Institutional class of those funds from $100 million to $5 million, causing a stampede out of the standard class by smaller 401k plans. In turn, that required Vanguard to sell assets in the standard class, generating realized gains.
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Re: Target date funds ... so much for "set and forget"

Post by mervinj7 »

dbr wrote: Fri Jan 21, 2022 10:31 am When an investor in a taxable account seeks to buy a fund that might not belong there, he says, a dialogue box could pop up saying something like: “This may not be the best home for your taxable dollars. Before you trade, click here to learn more.” That would link to more-suitable choices."

There is no such pop-up here at BH when people recommend balanced funds in taxable accounts.
+1 I, for one, have been generally ignoring posts that recommend balanced funds and target date funds in taxable even though I strongly disagree with that approach. But no longer... it will be added to the list of things I speak up about including taxation of CA HSAs, and not using Fidelity ZERO funds in taxable accounts.
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Re: Target date funds ... so much for "set and forget"

Post by H-Town »

Peculiar_Investor wrote: Fri Jan 21, 2022 10:26 am Heads up, this topic was mentioned today by Jason Zweig in The Huge Tax Bills That Came Out of Nowhere At Vanguard - WSJ.
Jason Zweig wrote:Fury erupted on Bogleheads.org, a website popular among Vanguard investors.

One investor posted there: “I think I’m screwed by Vanguard resulting in an enormous tax bill…. I feel that Vanguard guided me down this path which is frustrating.”

In the Bogleheads area on Reddit, another online forum, an investor posting as “Sitting-Hawk” said he received about $550,000 in distributions in Vanguard’s Target Retirement 2035 fund. So he owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000. “HOW,” he asked in capital letters, “COULD VANGUARD LET THIS HAPPEN??”
:mrgreen: "Sitting-Hawk" could have spent $30 on Boglehead Guide to Investing and avoid this mistake. Or even free if he read WIKI page on here about tax efficient investing.

There's a saying "blame yourself first before pointing your finger at someone else."
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Re: Target date funds ... so much for "set and forget"

Post by burritoLover »

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

Post by Whakamole »

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.
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Re: Wall Street Journal article about Vanguard distributions

Post by cas »

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

Post by Jason Zweig »

I wrote a column about this in today's WSJ:

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

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

Post by BernardShakey »

First world problem to say the least...
An important key to investing is having a well-calibrated sense of your future regret.
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