Has Vanguard Lost Its Way? [White Coat Investor]

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William Million
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by William Million »

Cheez-It Guy wrote: Sun May 22, 2022 1:56 am
William Million wrote: Sat May 21, 2022 11:44 pm There was also a time when TIAA-CREF was an industry leader in innovation. Obviously, those days are long gone.

Same thing has happened with Vanguard. Vanguard's role in history is indisputed. However, as things stand now, no rational Boglehead should hold funds with that company. If you want Vanguard ETFs, then buy them in a Fidelity, Schwab, Etrade, etc account. But not Vanguard.
What if I want access to all Vanguard mutual funds (including admiral class active funds and closed funds) as well as the ability to purchase them on a pre-arranged automated schedule with no fees?
Right. There are some Vanguard funds not available as ETFs and difficult to purchase under the same terms (Admiral) with other firms. If you really want these funds, you have no choice but to hold your nose and deal with Vanguard.

Me? I'll find a similar Vanguard ETF - or one with another fund company. As I said, I don't believe it is consistent with Bogleheadism to hold funds at Vanguard. The company represents poor value for money.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by JMacDonald »

William Million wrote: Sun May 22, 2022 7:26 pm
Cheez-It Guy wrote: Sun May 22, 2022 1:56 am
William Million wrote: Sat May 21, 2022 11:44 pm There was also a time when TIAA-CREF was an industry leader in innovation. Obviously, those days are long gone.

Same thing has happened with Vanguard. Vanguard's role in history is indisputed. However, as things stand now, no rational Boglehead should hold funds with that company. If you want Vanguard ETFs, then buy them in a Fidelity, Schwab, Etrade, etc account. But not Vanguard.
What if I want access to all Vanguard mutual funds (including admiral class active funds and closed funds) as well as the ability to purchase them on a pre-arranged automated schedule with no fees?
Right. There are some Vanguard funds not available as ETFs and difficult to purchase under the same terms (Admiral) with other firms. If you really want these funds, you have no choice but to hold your nose and deal with Vanguard.

Me? I'll find a similar Vanguard ETF - or one with another fund company. As I said, I don't believe it is consistent with Bogleheadism to hold funds at Vanguard. The company represents poor value for money.
It seems to me that people must have complex finances to complain about Vanguard. I have one mutual fund and am very happy with Vanguard. I don't find it a "poor value for money."
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William Million
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by William Million »

JMacDonald wrote: Sun May 22, 2022 8:47 pm
William Million wrote: Sun May 22, 2022 7:26 pm
Cheez-It Guy wrote: Sun May 22, 2022 1:56 am
William Million wrote: Sat May 21, 2022 11:44 pm There was also a time when TIAA-CREF was an industry leader in innovation. Obviously, those days are long gone.

Same thing has happened with Vanguard. Vanguard's role in history is indisputed. However, as things stand now, no rational Boglehead should hold funds with that company. If you want Vanguard ETFs, then buy them in a Fidelity, Schwab, Etrade, etc account. But not Vanguard.
What if I want access to all Vanguard mutual funds (including admiral class active funds and closed funds) as well as the ability to purchase them on a pre-arranged automated schedule with no fees?
Right. There are some Vanguard funds not available as ETFs and difficult to purchase under the same terms (Admiral) with other firms. If you really want these funds, you have no choice but to hold your nose and deal with Vanguard.

Me? I'll find a similar Vanguard ETF - or one with another fund company. As I said, I don't believe it is consistent with Bogleheadism to hold funds at Vanguard. The company represents poor value for money.
It seems to me that people must have complex finances to complain about Vanguard. I have one mutual fund and am very happy with Vanguard. I don't find it a "poor value for money."
I think you're right. With a single fund, no much for them to screw up.

Before I abandoned Vanguard, I was astounded how complicated it was for them to put my account into a joint trust and for them to see through a backdoor Roth. I opened accounts at 3 other major brokerages, banking thousands in incentives, and was pleased at how much better all 3 were at nearly everything.

However, if you're able to hold a single fund in taxable, no trusts, I suspect you are spared Vanguard's poor service.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by ScubaHogg »

billaster wrote: Sat May 21, 2022 11:13 pm
3. They could have simply merged the institutional and retail funds with no capital gain distributions. This is in fact what Vanguard did just a few months after the damage was already done.
This is the utterly perplexing part. Why didn’t they just do this from the start? It’s almost as if they went out of their way to make fund holders pay a bunch of unnecessary taxes.

Heck, they could have doubled the expense ratio of the fund and I still would have come out ahead vs the taxable event for the next decade plus.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by rkhusky »

billaster wrote: Sun May 22, 2022 11:16 am This mass exodus of institutional investors from the retail account wasn't some immaculate conception. Some 8000 CEOs didn't just wake up one morning and say "Hey, I think I'll check out the Vanguard Institutional Fund." It is almost certain that they were solicited by Vanguard sales reps by phone or email or letter to make the switch.
Doubtful. CEO's of large corporations have people that handle their 401k's. People who probably saw this announcement in Dec 2020:
https://corporate.vanguard.com/content/ ... -11-2.html

It wouldn't surprise me if everyone who had a 401k account with Vanguard got an email about it. If the 401k manager missed it, an employee probably forwarded it to him.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

rkhusky wrote: Mon May 23, 2022 7:28 am It wouldn't surprise me if everyone who had a 401k account with Vanguard got an email about it. If the 401k manager missed it, an employee probably forwarded it to him.
So where did the managers of the institutional funds get their email list of people in the retail fund? They must have gotten it from the managers of the retail fund. The managers and trustees of the retail fund colluded with the managers and trustees of the institutional fund to facilitate the poaching of their clients. Why would they do something that would cause great financial harm to some of their retail clients? Why would they simply ignore the obvious financial harm to some of their clients.

Remember the fiduciary duty is "first do no harm." Fiduciaries cannot take actions that benefit one set of their beneficiaries over the other. That is the inherent conflict of the same trustees representing both funds simultaneously.


But here's the thing. They needn't have caused this harm at all. As noted by ScubaHogg above, they could have simply merged the two funds, which is what they did anyway, after the harm was done.

But even easier than a merger, which might take some time, they could have simply reduced the fees to the same level in both funds. That announcement from Vanguard that you linked to? It could have just as easily said that all Vanguard Target Retirement Funds would have the same low fees, retail and institutional. And that's what they eventually did anyway.

Whether it was incompetence or malice or greed remains to be determined by a jury. But Vanguard could be liable for easily foreseeable and preventable damages regardless of the motivation.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

And for folks who think this problem is unique in some way to Target Retirement funds or that investors are to blame for using taxable accounts,
imagine for a moment the following scenario.

Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.

Practically overnight you would see hundreds of billions of redemptions from everyone holding the old Total Stock Market fund into the new zero fee fund. Only those stuck with high unrealized capital gains in taxable accounts would be left holding the bag. And ETF heartbeat trades wouldn't save you on that volume of redemptions.

So look at your balance of Total Stock Market Fund in your taxable account and imagine a forced 25% capital gains distribution and its effect on next year's taxes. Note that this is money that is up in smoke and gone forever. It doesn't reduce your future capital gains taxes in any way.

Would you be saying "Well, no problem, it's good for the tax-deferred investors." No, I'm guessing folks would be squealing like a stuck pig at the unfairness of it all.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by rkhusky »

billaster wrote: Mon May 23, 2022 10:15 am
rkhusky wrote: Mon May 23, 2022 7:28 am It wouldn't surprise me if everyone who had a 401k account with Vanguard got an email about it. If the 401k manager missed it, an employee probably forwarded it to him.
So where did the managers of the institutional funds get their email list of people in the retail fund? They must have gotten it from the managers of the retail fund. The managers and trustees of the retail fund colluded with the managers and trustees of the institutional fund to facilitate the poaching of their clients.
Why would the fund managers be involved in sending marketing emails? That is the job of the marketing department, who maintain a variety of email lists for which to send different marketing emails. I imagine the marketing department could have sent out an email blast about the good news that Vanguard was making the lower cost institutional funds available to more companies either to all 401k participants or to everyone that they had associated with managing a 401k plan. There is no need to imagine a conspiracy of fund managers acquiring secret email addresses.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by rkhusky »

billaster wrote: Mon May 23, 2022 10:42 am Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.

Practically overnight you would see hundreds of billions of redemptions from everyone holding the old Total Stock Market fund into the new zero fee fund. Only those stuck with high unrealized capital gains in taxable accounts would be left holding the bag. And ETF heartbeat trades wouldn't save you on that volume of redemptions.
Did that happen when Fidelity introduced their Zero funds? Was there mass migration from FSKAX or FTIHX?
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by lazynovice »

rkhusky wrote: Mon May 23, 2022 10:57 am
billaster wrote: Mon May 23, 2022 10:42 am Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.

Practically overnight you would see hundreds of billions of redemptions from everyone holding the old Total Stock Market fund into the new zero fee fund. Only those stuck with high unrealized capital gains in taxable accounts would be left holding the bag. And ETF heartbeat trades wouldn't save you on that volume of redemptions.
Did that happen when Fidelity introduced their Zero funds? Was there mass migration from FSKAX or FTIHX?
Fidelity does not offer Zero funds in institutional accounts. They did combine the retail and institutional classes of their total market funds resulting in lower fees for retail holders of those funds around the same time as the zero funds introduction. What Vanguard should have done here.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

rkhusky wrote: Mon May 23, 2022 10:57 am
billaster wrote: Mon May 23, 2022 10:42 am Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.

Practically overnight you would see hundreds of billions of redemptions from everyone holding the old Total Stock Market fund into the new zero fee fund. Only those stuck with high unrealized capital gains in taxable accounts would be left holding the bag. And ETF heartbeat trades wouldn't save you on that volume of redemptions.
Did that happen when Fidelity introduced their Zero funds? Was there mass migration from FSKAX or FTIHX?
Now you are just dodging the question by nitpicking the likeliness of the scenario. You can't just say it wouldn't happen. Certainly the investors in Target Retirement never imagined that it would happen. I'm asking you if you would consider the same scenario in the Total Stock Market Fund as fair. It's a simple question.

What these discussions often come down to is whose ox is gored. As long as its isn't your ox, why should you care?
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by rkhusky »

billaster wrote: Mon May 23, 2022 11:10 am
rkhusky wrote: Mon May 23, 2022 10:57 am
billaster wrote: Mon May 23, 2022 10:42 am Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.

Practically overnight you would see hundreds of billions of redemptions from everyone holding the old Total Stock Market fund into the new zero fee fund. Only those stuck with high unrealized capital gains in taxable accounts would be left holding the bag. And ETF heartbeat trades wouldn't save you on that volume of redemptions.
Did that happen when Fidelity introduced their Zero funds? Was there mass migration from FSKAX or FTIHX?
Now you are just dodging the question by nitpicking the likeliness of the scenario. You can't just say it wouldn't happen. Certainly the investors in Target Retirement never imagined that it would happen. I'm asking you if you would consider the same scenario in the Total Stock Market Fund as fair. It's a simple question.

What these discussions often come down to is whose ox is gored. As long as its isn't your ox, why should you care?
If Vanguard came out with a zero-expense fund based on a different index and people decided to sell VTSAX and buy that fund, it wouldn't bother me at all. I don't worry about what other people do. Investing in stocks is risky and Vanguard doesn't hide the fact that VTSAX has unrealized gains that equal about 50% of the current NAV. I think the scenario is very unlikely to occur, and investing also involves assessing the probabilities of different events occurring. With that said, investors should be aware of unrealized gains for all the funds in their taxable accounts.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

rkhusky wrote: Mon May 23, 2022 12:11 pm If Vanguard came out with a zero-expense fund based on a different index and people decided to sell VTSAX and buy that fund, it wouldn't bother me at all. I don't worry about what other people do. Investing in stocks is risky and Vanguard doesn't hide the fact that VTSAX has unrealized gains that equal about 50% of the current NAV. I think the scenario is very unlikely to occur, and investing also involves assessing the probabilities of different events occurring. With that said, investors should be aware of unrealized gains for all the funds in their taxable accounts.
Would it bother you at all if you had to pay tens or hundreds of thousands of dollars next year in unnecessary capital gains taxes because of a marketing decision by Vanguard salespeople? A completely avoidable marketing decision? You would be okay with that?

Yes, stocks are risky and investment decisions are risky. But are marketing decisions by salespeople a part of your risk assessment?
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by vineviz »

billaster wrote: Mon May 23, 2022 12:22 pm Would it bother you at all if you had to pay tens or hundreds of thousands of dollars next year in unnecessary capital gains taxes because of a marketing decision by Vanguard salespeople? A completely avoidable marketing decision? You would be okay with that?
Do we have even one example of anyone holding $20 million worth of Vanguard Target Retirement Income Fund (VTINX) in a taxable account?
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

vineviz wrote: Mon May 23, 2022 12:39 pm
billaster wrote: Mon May 23, 2022 12:22 pm Would it bother you at all if you had to pay tens or hundreds of thousands of dollars next year in unnecessary capital gains taxes because of a marketing decision by Vanguard salespeople? A completely avoidable marketing decision? You would be okay with that?
Do we have even one example of anyone holding $20 million worth of Vanguard Target Retirement Income Fund (VTINX) in a taxable account?
Is that relevant? What's the importance of $20 million? The example was the Total Stock Market Fund. But the Target Retirement 2035 Fund alone distributed $6.5 billion in capital gains which likely cost taxpayers at least $1 billion in unnecessary taxes. That's a lot of economic damage. Edit: Sorry, insufficient data to make an accurate calculation at this time. We will know more if the judge certifies the case as a class action.

One person said they received about $550,000 in capital gains distributions in Vanguard’s Target Retirement 2035 fund. So he likely owes 23.8% in federal tax and 4.95% in Illinois state tax—all told, more than $150,000.

If someone is stuck with a $10,000 tax bill or a $1,000 tax bill, is that any less of fiasco? It was totally unnecessary and avoidable by Vanguard. Plaintiffs are entitled to restitution and/or damages if proven that defendants breached their fiduciary duty to all shareholders. That will be decided by a judge and jury.
Last edited by billaster on Mon May 23, 2022 3:46 pm, edited 1 time in total.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by vineviz »

billaster wrote: Mon May 23, 2022 1:46 pm Is that relevant? What's the importance of $20 million?
You mentioned "hundreds of thousands of dollars ... in unnecessary capital gains taxes", which would require an eight figure taxable investment in one of the effected target date funds.

I'm just trying to establish whether that is a "real" example or inflammatory hyperbole.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

vineviz wrote: Mon May 23, 2022 1:51 pm
billaster wrote: Mon May 23, 2022 1:46 pm Is that relevant? What's the importance of $20 million?
You mentioned "hundreds of thousands of dollars ... in unnecessary capital gains taxes", which would require an eight figure taxable investment in one of the effected target date funds.

I'm just trying to establish whether that is a "real" example or inflammatory hyperbole.
Go back are read what I said. I was talking about the hypothetical case of Total Stock Market Fund.

And I'm afraid your calculations are off by an order of magnitude. A $20 million investment could result in more than a $1 million tax bill.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by deikel »

Rex66 wrote: Sat May 21, 2022 2:59 pm Not sure why people think vanguard had a fiduciary responsibility on this? The fiduciary rules don’t seem to apply.

Still I think vanguard will have to settle eventually since I believe it can be reasonably shown they did this for the reasons mentioned.
I think it follows out of this idea that vanguard is somehow morally superior to the other options you have to invest with (Fido Schwab you name them).

I am not even sure that Vanguard advertises with better morals per se, but its a very common theme here on bogleheads that vanguard is set up such that 'profit is not the driving force'.

When in reality, now that the rest of the investment market has adjusted to the passive investing philosophy and came around to its advantages and how to make money without fees just fine, they often provide better products then the original, with better service and websites to boot.

I assume brand loyalty can look over some shortcomings (website), but if something happens that attacks the very tenant of the loyalty, people will get quite upset (something they may have expected or forgiven Fido say) and overcorrect.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by PugetSoundguy »

I'm reminded of what a law professor teaching Health Care Law asked so many years ago:

"What's the difference between a for-profit health care provider and a non-profit institution?"

Lots of lengthy answers volunteered by students.

The professor's answer: "Nothing."

Maybe exaggerated, but probably not by much. I still like Vanguard but their executives and board members are motivated by the same things that motivate executives and board members everywhere. Except maybe it's a little easier for them at Vanguard because there's not as much transparency as at a publicly-held company or even a privately-held company where the actual owners are keeping an eye on you. But like I said, I still like and appreciate Vanguard, I'm just realistic about its structure.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by 8foot7 »

It's beyond me how some people seem to think this isn't an issue. Even if is $1 more in taxes that fundholders had to pay, the sequence of actions undertaken by Vanguard makes no sense and the plainest, simplest conclusion to draw is that it was a regrettable mistake that should have been avoided.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by retiringwhen »

billaster wrote: Mon May 23, 2022 11:10 am Certainly the investors in Target Retirement never imagined that it would happen.
Well they should have imaged it. Morningstar has clearly and carefully documented in the past 5 years that almost every Mutual Fund Complex has seen extraordinary capital gains distributions from the their Target Date Retirement Funds within the last decade.

Such event should be considered likely around once a decade. The specific circumstances around the Vanguard fiasco are interesting, but the root cause of the distributions was a pretty pedestrian fund flows issue. This is one of three primary drivers for the events across the industry. The other two being strategy changes for the asset allocation and and changing out underlying funds and/or indexes.

The very concept of a target date fund was invented for tax-advantaged retirement funds optimized for buy and hold (forget?) investors in a tax agnostic environment, thus are by design tax inefficient. I don't think that inefficiency can be "fixed" as the glide path, all in one investment model using funds of funds is very tax inefficient.

Additionally, traditional balance funds like Fidelity Puritan, Wellington/Wellesley or even the Vanguard LifeStrategy are primarily marketed to individual investors while 99% of the TDF money is targeted to pension administrators for institutions. This makes the fund operations have completely different sensitivity to tax considerations. In the end, I think it likely we'll find that this difference is one reason the fiasco happened as the Vanguard TDF fund managers didn't even consider the tax consequences for individual investors since there so few of them.

Anyone with 7 figures in a taxable brokerage account TDF investment really has not done their due diligence for a significant investment if they are surprised by the tax bill.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by retiringwhen »

retiringwhen wrote: Mon May 23, 2022 2:36 pm Well they should have imaged it. Morningstar has clearly and carefully documented in the past 5 years that almost every Mutual Fund Complex has seen extraordinary capital gains distributions from the their Target Date Retirement Funds within the last decade.
This is the article from Morningstar, I suggest anyone who doubts my comments above should read this from an industry expert: Lessons From Vanguard Target-Date’s Capital Gains Surprise


Also, much of the current discussion was litigated in excruciating detail in this thread
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by exodusNH »

billaster wrote: Mon May 23, 2022 12:22 pm
rkhusky wrote: Mon May 23, 2022 12:11 pm If Vanguard came out with a zero-expense fund based on a different index and people decided to sell VTSAX and buy that fund, it wouldn't bother me at all. I don't worry about what other people do. Investing in stocks is risky and Vanguard doesn't hide the fact that VTSAX has unrealized gains that equal about 50% of the current NAV. I think the scenario is very unlikely to occur, and investing also involves assessing the probabilities of different events occurring. With that said, investors should be aware of unrealized gains for all the funds in their taxable accounts.
Would it bother you at all if you had to pay tens or hundreds of thousands of dollars next year in unnecessary capital gains taxes because of a marketing decision by Vanguard salespeople? A completely avoidable marketing decision? You would be okay with that?

Yes, stocks are risky and investment decisions are risky. But are marketing decisions by salespeople a part of your risk assessment?
You would do well to read this thread: viewtopic.php?p=6568159#p6568159

Institutional investors were on the verge of leaving the fund anyway due to the expense ratios offered by competitors. Offering the suggestion that Vanguard Retail sold their client list to Vanguard Institutional is unnecessary conspiracy think.

As someone else noted, alex_686 pointed out that tax advice / consideration is not Vanguard's concern and that actively being concerned with it could have gotten them in trouble.

We don't know why Vanguard merged them after the fact. maybe it was because they realized they made a mistake. Maybe, after all those who were eligible for the institutional pricing left, the funds didn't have enough AUM to be worth the hassle.

The taxes people paid were always going to be due, unless they were wealthy enough to die holding those funds unspent. Their basis has been moved higher. When they go to sell those funds 10 or 20 years from now, perhaps they will have saved in taxes. It's not inconceivable that tax rates will rise in the future to cover and aging population with fewer younger people supporting each older person.

We also don't know how much of the gains were due to outflow vs rebalancing out stocks, which had a fantastic run, to maintain the proper internal AA. There's also the effect of the rising glide path. Not only did the fund have to sell stocks to adjust the AA, but the AA itself might have moved an additional % to match the glide path.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

retiringwhen wrote: Mon May 23, 2022 2:36 pm
billaster wrote: Mon May 23, 2022 11:10 am Certainly the investors in Target Retirement never imagined that it would happen.
Well they should have imaged it. Morningstar has clearly and carefully documented in the past 5 years that almost every Mutual Fund Complex has seen extraordinary capital gains distributions from the their Target Date Retirement Funds within the last decade.
Nothing nearly on this scale. And what is unique about this case is that it wasn't due to stock market fluctuations or normal inflows and outflows.

It was a mass stampede engineered by Vanguard salespeople for unknown reasons. There's nothing unique about Target Retirement Funds. Vanguard could have done the same to the Total Stock Market fund and people would be screaming bloody murder.

And it was a totally inexcusable boneheaded move. First they engineered a mass exodus from the retail fund creating unnecessary capital gains and then they put them right back together again in a merger. It would have been much easier to just lower fees across the board in the beginning -- which is exactly what they did in the end.

Vanguard managers and trustees are going to have to explain their thinking in front of a jury.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by Ketawa »

billaster wrote: Mon May 23, 2022 10:42 am So look at your balance of Total Stock Market Fund in your taxable account and imagine a forced 25% capital gains distribution and its effect on next year's taxes. Note that this is money that is up in smoke and gone forever. It doesn't reduce your future capital gains taxes in any way.
This is wrong. A capital gains distribution will reduce the NAV of the fund, so unrealized gains will be reduced by the amount of the distribution, all other things being equal. For example, the NAV for Vanguard Target Retirement 2040 Fund (VFORX) fell about 17% in one day when the 2021 distribution happened, from $50.77 to $42.07.

A person who does not reinvest the distribution has the same number of shares they used to have with lower unrealized capital gains.

A person who reinvests the distribution now owns all their original shares with their original cost basis and lower unrealized capital gains, and a bunch of additional shares at a high cost basis with no unrealized gains.

I'm not saying this wasn't terrible for taxable investors, but it does reduce future capital gains taxes. Capital gains taxes will be due eventually, unless the investor can find a way around them (step-up in basis, donate to charity, etc).
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by retiringwhen »

billaster wrote: Mon May 23, 2022 4:01 pm Nothing nearly on this scale. And what is unique about this case is that it wasn't due to stock market fluctuations or normal inflows and outflows.
Please read the article link previously: https://www.morningstar.com/articles/10 ... s-surprise and come back and explain to me how Vanguard's distributions were on a different scale.

Second, fund flows almost always happen when a different fund attracts money from the losing, less attractive fund by some more attractive feature. That is what happened with most of the examples provided in the article. That is also exactly what happened to Vanguard investors. This is an actual expected outcome, the only thing I will agree is that is unusual for the same Fund Complex to be the poacher. The 401K business is probably the most competitive and cut-throat part of the entire fund management business. Fund outflows to more attractive funds is a regular and expected occurrence. And TDF's are the most sensitive funds due to the fact that they hold such a large percentage of the overall 401K assets, plus they are vanilla and easily substituted.

Vanguard is a pretty strong player in the industry, obviously, but they will not always win. In the future, when they lose to a better offer by a competitor, a major capital gains distribution would absolutely happen again and there won't be any evil/stupid Vanguard Managers to blame.

BTW, in the other thread, we did a lot of research as to WHY Vanguard may have made such a move on the $5M minimum. There were two major announcements in the same quarter, one from Fidelity and one from Schwab that both offered TDF's at ERs that would have made Vanguard uncompetitive for institutions with $5M to $100M AUM without the dreaded change that precipitated this whole debacle. I know what conclusions I drew from that observation, hint: time was not on their side.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

retiringwhen wrote: Mon May 23, 2022 6:36 pm Second, fund flows almost always happen when a different fund attracts money from the losing, less attractive fund by some more attractive feature. That is what happened with most of the examples provided in the article. That is also exactly what happened to Vanguard investors. This is an actual expected outcome, the only thing I will agree is that is unusual for the same Fund Complex to be the poacher.
So Vanguard was afraid that Fidelity would poach their retail investors and cause large capital gains so Vanguard poached them themselves to cause large capital gains.

I recall this as "we had to destroy the village in order to save it." It will be hilarious if Vanguard tries this argument in front of a jury.

No, the simple thing if Vanguard was afraid of poaching was to just cut all fees across the board for retail and institutional investors. It would have taken a mere stroke of the pen, figuratively speaking. And that indeed was exactly what they did -- after they had knee-capped their own clients.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by retiringwhen »

billaster wrote: Mon May 23, 2022 7:26 pm
retiringwhen wrote: Mon May 23, 2022 6:36 pm Second, fund flows almost always happen when a different fund attracts money from the losing, less attractive fund by some more attractive feature. That is what happened with most of the examples provided in the article. That is also exactly what happened to Vanguard investors. This is an actual expected outcome, the only thing I will agree is that is unusual for the same Fund Complex to be the poacher.
So Vanguard was afraid that Fidelity would poach their retail investors and cause large capital gains so Vanguard poached them themselves to cause large capital gains.

I recall this as "we had to destroy the village in order to save it." It will be hilarious if Vanguard tries this argument in front of a jury.

No, the simple thing if Vanguard was afraid of poaching was to just cut all fees across the board for retail and institutional investors. It would have taken a mere stroke of the pen, figuratively speaking. And that indeed was exactly what they did -- after they had knee-capped their own clients.
They had a problem with no longer being the low-cost provider and in the past Fidelity had put some hurt on them in this exact market, and now Schwab appeared to be prepping for an attempt to gain some market share. Vanguard had pressure that could have caused a serious loss of AUM. For small institutions in the $5M to $100M it could easily be done within 6 mos., in smaller plans with just a few participants it could likely be done in a week or two. My conjecture was that Schwab was gunning for that business as their clients probably had a large number of small businesses that would be easily poached from Vanguards now very uncompetitive offering via advisors and other channels.

The mechanics of lowering the ER on those funds is not a stroke of a pen as it would require the movement of the underlying funds to either new share classes (trivial) or transfer to different funds completely (more complicated, but doable, but it could also cause capital gains issues if not handled well) as the ER is a roll up of the underlying funds. The ER can only be changed once those moves are made and must match the underlying funds exactly.

BTW, there are no Vanguard multi-share class funds of funds for this reason I believe thus making the solution used with the large index funds moot.

I would guess Vanguard did NOT want to lower the costs of their retails funds to 0.08% for all the unwashed masses with $1,000 Roth accounts and instead made the move to use a stroke of a pen to lower the minimum on the institutional fund instead. They were then surprised that 8,000 companies all jumped in the next 6 mos. and they created a mess that was much bigger than projected. The mess required a fix and the merger and lower ER turned out to be best solution. It is easy to be a backseat driver, but it could have easily gone very differently both good and bad.

Let's consider some alternate history possibilities:

1.) Vanguard sat still on their ER and waited the 6-9 mos. and saw half the 401K retail assets leave. They would have been lambasted by the industry for being losers, lost prestige and market-share while also sticking all their retail fund customers with huge capital gains.

2.) Let's say instead things happened just like they did, but instead of seeing the US Stock and Bond markets return nearly unprecedented returns, they simply returned the projection that Vanguard put out for 2021 of about 4%. One of the other posters estimated that such a different market would have made the capital gains event almost completely disappear! Maybe the fund managers considered the funds flows problem and considered it likely to be small, but instead the market had a historical blow out!

It is easy to criticize decisions after the fact, but it is a lot harder to look at a situation with only the information available at the decision time. I am not arguing Vanguard is somehow angels here, I am only pointing out that this was not a capricious decision made that was assured to be detrimental to a vanishingly tiny set of shareholders, it was surely done in the context of a complex, competitive environment with strong incentives to retain customers.

One point, not often pointed out, but implied: it is pretty well known that Vanguard executives are compensated and incented based upon growth of AUM, so any threatened loss of assets would be expected to be attacked vigorously. This does demonstrate a very good example of the Agency risk problem.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by billaster »

retiringwhen wrote: Mon May 23, 2022 8:09 pm The mechanics of lowering the ER on those funds is not a stroke of a pen as it would require the movement of the underlying funds to either new share classes (trivial) or transfer to different funds completely (more complicated, but doable, but it could also cause capital gains issues if not handled well) as the ER is a roll up of the underlying funds. The ER can only be changed once those moves are made and must match the underlying funds exactly.
No reason that fees couldn't just be lowered across the board with a stroke of the pen. No new share classes required. No movement of funds required. Just set the fees for both institutional and retail funds at the new lower rate -- which is what they did eventually anyway.
One point, not often pointed out, but implied: it is pretty well known that Vanguard executives are compensated and incented based upon growth of AUM, so any threatened loss of assets would be expected to be attacked vigorously. This does demonstrate a very good example of the Agency risk problem.
This is one reason I look forward to the trial. It's likely that the plaintiffs will require disclosure of Vanguard's secretive compensation and incentive plans as to motive. If it turns out that trustees and managers were acting in their own best interest instead of their clients, it could go very badly for Vanguard. We will see what a jury thinks about that.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by Rex66 »

deikel wrote: Mon May 23, 2022 2:19 pm
Rex66 wrote: Sat May 21, 2022 2:59 pm Not sure why people think vanguard had a fiduciary responsibility on this? The fiduciary rules don’t seem to apply.

Still I think vanguard will have to settle eventually since I believe it can be reasonably shown they did this for the reasons mentioned.
I think it follows out of this idea that vanguard is somehow morally superior to the other options you have to invest with (Fido Schwab you name them).

I am not even sure that Vanguard advertises with better morals per se, but its a very common theme here on bogleheads that vanguard is set up such that 'profit is not the driving force'.

When in reality, now that the rest of the investment market has adjusted to the passive investing philosophy and came around to its advantages and how to make money without fees just fine, they often provide better products then the original, with better service and websites to boot.

I assume brand loyalty can look over some shortcomings (website), but if something happens that attacks the very tenant of the loyalty, people will get quite upset (something they may have expected or forgiven Fido say) and overcorrect.
People commonly think bc vanguard is mutual that this means jack squat. it doesnt. All the big whole life companies are mutual and they arent looking out for you.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by boglesmind »

I wonder why this thread is not locked. What happened to Vanguard's target date funds is not under any of our control. You can all discuss until cows come home whether Vanguard lost its way or not. Opinions on either side aren't going to be changed. Why not take this useless and non-personal and non-actionable discussion to reddit instead of turning this forum into reddit?

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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by S_Track »

Ketawa wrote: Mon May 23, 2022 6:23 pm
billaster wrote: Mon May 23, 2022 10:42 am So look at your balance of Total Stock Market Fund in your taxable account and imagine a forced 25% capital gains distribution and its effect on next year's taxes. Note that this is money that is up in smoke and gone forever. It doesn't reduce your future capital gains taxes in any way.
This is wrong. A capital gains distribution will reduce the NAV of the fund, so unrealized gains will be reduced by the amount of the distribution, all other things being equal. For example, the NAV for Vanguard Target Retirement 2040 Fund (VFORX) fell about 17% in one day when the 2021 distribution happened, from $50.77 to $42.07.

A person who does not reinvest the distribution has the same number of shares they used to have with lower unrealized capital gains.

A person who reinvests the distribution now owns all their original shares with their original cost basis and lower unrealized capital gains, and a bunch of additional shares at a high cost basis with no unrealized gains.

I'm not saying this wasn't terrible for taxable investors, but it does reduce future capital gains taxes. Capital gains taxes will be due eventually, unless the investor can find a way around them (step-up in basis, donate to charity, etc).
Just to be clear, these types of capital gains are an actual distribution? Meaning if you have reinvestment turned off, you will end up with a deposit in your settlement account along with a reduced Nav on the fund?
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by S_Track »

billaster wrote: Mon May 23, 2022 10:42 am And for folks who think this problem is unique in some way to Target Retirement funds or that investors are to blame for using taxable accounts,
imagine for a moment the following scenario.

Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.
I have thought about this before, what if VG decided to replace Total Stock and Total International in their TD with Total World. I would assume they would do this slowly over time but if done all at once I am guessing that would be a huge outflow from those two funds.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

Post by retiringwhen »

S_Track wrote: Tue May 24, 2022 3:56 am Imagine that tomorrow that the Vanguard Institutional Total Stock Market Fund announced that in order to compete with Fidelity's Zero funds, they would now offer zero fees for any account over $100,000. And just to make it easy, they put a button on your home page that says, Click to convert to zero fees.
Well currently there are no retail customers holding that fund (VITNX) unless they are a very odd bird, so no one in the world would care about CG distributions. This is an orphan fund from their structure before moving large amount of the old Institutional Total Stock Market Index assets into a CIT called the Institutional Total Stock Market Index Trust (Fund #1885). This fund was never really available to any retail customers outside retirement plans in either of its two share classes. Over 90% of the assets of this fund are currently held by the CIT.

Today for both retail and institutional investors, there is the Total Stock Market Index Fund that has 6 share classes plus a CIT including Institutional and Institutional Plus that replicate the fund you mention.

If Vanguard wanted to open a new share class at zero ER, the could just create the VGZERO(TM) share class of this fund. All conversions would be tax-free to the investor and simply a book keeping update by Vanguard. In fact, that process has happened regularly over the past twenty years with the lowering of Admiral Class fees and the steady creation of new higher minimum classes with lower and lower fees including Collective Index Trusts (CIT).

In other words, your scenario would be heralded as some kind of great move by Vanguard and loved by all involved.

Now, I wonder why they didn't do this with the TDFs? Because the the structure of the Funds made it impossible due to the fund of funds structure.
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Re: Has Vanguard Lost Its Way? [White Coat Investor]

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