Vanguard Target Fund Conundrum/Debacle

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Curlyhead
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Vanguard Target Fund Conundrum/Debacle

Post by Curlyhead »

I was one of the foolish ones who had a good amount in Vanguard's Target retirement funds in a taxable account. They are not giving me a straight answer what capital gains will look like for this year. I'm not sure if I need to get out of that fund or by how much or what without spending all my cash on taxes. Feeling desperate for advice.

https://www.classaction.org/news/lawsui ... d-sell-off
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LadyGeek
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by LadyGeek »

Welcome! We have a thread on that: [Vanguard sued over taxable distributions in Target Date Funds] Please note that the discussion is closed. Don't make further lawsuit comments here.

To get you going, may I suggest you post your portfolio information in this thread using the Asking Portfolio Questions format? It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them here.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
dbr
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by dbr »

Before you rule in or rule out leaving that fund be sure you have accurate numbers for your current gains. It will be much less than it was before the unfortunate distributions. The drops in both stock and bond prices this year will drive your potential unrealized gains even lower. If there is going to be a time to get out now might be it.

Also, it seems unlikely last year's particular problem would be repeated. I don't think anyone you would talk to at Vanguard can actually give you an estimate of this year's capital gains distribution, but with market losses, there is not likely to be any.
mhalley
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by mhalley »

I agree that getting out of it all at once but facing a huge tax bill is not the best way to go. The confluence of events are unlikely to repeat in the near future. I would set up a plan to divest over the next x number of years, based on how much tax you are willing to pay each year, while turning off dividend reinvestment.
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retired@50
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by retired@50 »

Curlyhead wrote: Thu Jun 23, 2022 10:43 am ... They are not giving me a straight answer what capital gains will look like for this year.
... Feeling desperate for advice.
Welcome to the forum. :happy

I don't really see how they could answer your question about capital gains for this year since the year isn't over.
Nobody, ... not even a mutual fund manager,... can predict the future.

If you have capital losses on any of your purchase lots, you could sell those and harvest the losses, and/or sell some of the purchase lots that have gains so you net out to someplace near zero. There is a wiki that discusses paying a tax cost to switching funds.
More details here: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

While I think it's unlikely there will be a repeat of this, you can read-up on tax efficient fund placement if you're curious to learn more about which types of funds should be held in which types of accounts.
Tax efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
cas
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by cas »

Curlyhead wrote: Thu Jun 23, 2022 10:43 am [Vanguard is] not giving me a straight answer what capital gains will look like for this year.
Vanguard updates realized cap gains year-to-date for each of their funds monthly on their website, under the Distributions tab for each fund's information page.

e.g. for Target Retirement 2040 (VFORX), realized cap gains through 5/31/2021 is 0.59%. https://investor.vanguard.com/investmen ... tributions

This information is of limited use this time of year, since there is a still a lot of the year to go for unpredictable things to happen in the world, markets, and in net fund flows that is beyond the control of any mutual fund manager. About the best it tells you at this time of year is whether anything odd seems to have gone on in the first 5 months of the year.

(Hopefully this post doesn't run afoul of Lady Geek's "don't post" directive since it answers a different portion of OP's question.)
Last edited by cas on Thu Jun 23, 2022 11:22 am, edited 1 time in total.
exodusNH
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by exodusNH »

Curlyhead wrote: Thu Jun 23, 2022 10:43 am I was one of the foolish ones who had a good amount in Vanguard's Target retirement funds in a taxable account. They are not giving me a straight answer what capital gains will look like for this year. I'm not sure if I need to get out of that fund or by how much or what without spending all my cash on taxes. Feeling desperate for advice.

https://www.classaction.org/news/lawsui ... d-sell-off
They can't tell you because they have no way to know. It depends on both what the market does and what people do. If the bond market rallies, they may have to sell bonds to balance back into stocks, or vice-versa. If Fidelity opens up a Zero target date fund, they could see massive outflows.

The issue from last year is most likely a one-time issue.

With the big dividend payout last year, you probably have some losses you can harvest. If you no longer want the fund, turn off dividend reinvestment and sell off the lots that have losses.
alex_686
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by alex_686 »

Welcome!

Having worked in mutual fund accounting it is very hard to estimate what the capital gains will be at the end of the year. So please don't criticize Vanguard for this.

Now last year was both a rare one-off evet that Vanguard mishandled. This particular situation will never happen again. This general situation is rare. A fair amount of the unrealized capital gains has been realized so even if this class of events were to happen then the distributions will be low. i.e., your barn has already burned to the ground. It is not going to burn down the same way again.

Now I have mixed feelings about Target Date funds in taxable. The benefits of simplify often outweigh the (often) minor tax burden. As such I would ignore this one off event. However if you do want to shift now would be the time.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
HomeStretch
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Re: Vanguard Target Fund Conundrum/Debacle

Post by HomeStretch »

Welcome to the forum!

What is your unrealized capital gain on the target date fund (TDF) held in your Taxable account? Is the gain short-term or long-term?

If your gain is not large and your portfolio includes a mix of Taxable, Tax Deferred and Roth accounts, it may be a good time to sell some/all of the TDF and move to a 3-fund or 4-fund portfolio using tax-efficient fund placement. Here’s a link to the BH wiki page about tax-efficient fund placement:
https://www.bogleheads.org/wiki/Tax-eff ... _placement

For best advice, consider posting your financial picture in the “Asking Portfolio Questions” format linked by LadyGeek, above.
ifish100
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Re: Vanguard Target Fund Conundrum/Debacle

Post by ifish100 »

I turned off the reinvestment option long ago to get out of VTTVX (target date 2025), something mentioned above seems interesting the idea of selling off the lots purchased that do not have gains in order to divest, is there a setting on the VG website to display the capital gains on each lot?

That sounds like a good way to reduce the risk of another debacle without too much pain of having to pay the taxes to get rid of it. Then you could use Tax Loss Harvesting of other investments to get rid of the lots with gains over a period of time, it could be done over years.

I have a feeling there will be a reason I cannot do that, but it sounds appealing if possible.

Also it was my understanding initially that people (in those small companies 401k that caused the stampede) only had the opportunity to do that transfer over to the low cost fund, which caused the debacle until February of 2022. If there is no time limit to it, 2022 could be another tax disaster, 2023...and so on. In the barn burning down analogy above only 40% of my barn burned down (40% of the cap gains in my holding paid out), there is still 60% of my barn to burn. I asked that Feb 2022 question to Vanguard last year and got no answer, the fact there is still no answer sounds like there is no time limit, and no limit to the damage it will continue to cause.
exodusNH
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Re: Vanguard Target Fund Conundrum/Debacle

Post by exodusNH »

ifish100 wrote: Thu Jun 23, 2022 7:36 pm I turned off the reinvestment option long ago to get out of VTTVX (target date 2025), something mentioned above seems interesting the idea of selling off the lots purchased that do not have gains in order to divest, is there a setting on the VG website to display the capital gains on each lot?

That sounds like a good way to reduce the risk of another debacle without too much pain of having to pay the taxes to get rid of it. Then you could use Tax Loss Harvesting of other investments to get rid of the lots with gains over a period of time, it could be done over years.

I have a feeling there will be a reason I cannot do that, but it sounds appealing if possible.

Also it was my understanding initially that people (in those small companies 401k that caused the stampede) only had the opportunity to do that transfer over to the low cost fund, which caused the debacle until February of 2022. If there is no time limit to it, 2022 could be another tax disaster, 2023...and so on. In the barn burning down analogy above only 40% of my barn burned down (40% of the cap gains in my holding paid out), there is still 60% of my barn to burn. I asked that Feb 2022 question to Vanguard last year and got no answer, the fact there is still no answer sounds like there is no time limit, and no limit to the damage it will continue to cause.
Vanguard merged the retail and institutional funds. There won't be switching like that again.
ifish100
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Re: Vanguard Target Fund Conundrum/Debacle

Post by ifish100 »

Exodus... if you are correct on that, I will sleep better. The LT cap gains debacle VG subjected some of us to... if they did merge them and thus correcting the mechanism that created the issue.... VG should issue a letter to each of us that was burned, they obviously know who we are, to inform us the debacle will not be repeated because the funds were merged. Maybe because they are under the lawsuit they want to avoid doing that, kind of admitting the wrong doing, not sure.

If this is correct and no other mass exodus is expected, there would seem to be little reason to get rid of it. Until last year there was no problem owning VTTVX in taxable.

Thank you.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by dbr »

ifish100 wrote: Thu Jun 23, 2022 7:56 pm Exodus... if you are correct on that, I will sleep better. The LT cap gains debacle VG subjected some of us to... if they did merge them and thus correcting the mechanism that created the issue.... VG should issue a letter to each of us that was burned, they obviously know who we are, to inform us the debacle will not be repeated because the funds were merged. Maybe because they are under the lawsuit they want to avoid doing that, kind of admitting the wrong doing, not sure.

If this is correct and no other mass exodus is expected, there would seem to be little reason to get rid of it. Until last year there was no problem owning VTTVX in taxable.

Thank you.
Probably the long term reason to take advantage of an opportunity to change out of this fund now is that as time goes on unrealized gains will accumulate to a point that changing is no longer an option. As a generalization locating a TD fund in taxable is not the most tax efficient choice, disasters aside, and one could consider that for the future. As you age and your income also increases this fund will eventually hold mostly bonds, which might not be what you want.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by cas »

dbr wrote: Thu Jun 23, 2022 8:38 pm
ifish100 wrote: Thu Jun 23, 2022 7:56 pm
ifish in post earlier in thread:
I turned off the reinvestment option long ago to get out of VTTVX (target date 2025) [. . .]

[. . .]

If this is correct and no other mass exodus is expected, there would seem to be little reason to get rid of it. Until last year there was no problem owning VTTVX in taxable.
Probably the long term reason to take advantage of an opportunity to change out of this fund now is that as time goes on unrealized gains will accumulate to a point that changing is no longer an option. As a generalization locating a TD fund in taxable is not the most tax efficient choice, disasters aside, and one could consider that for the future. As you age and your income also increases this fund will eventually hold mostly bonds, which might not be what you want.
As background, I prepare taxes for assorted elderly relatives who hold most of their assets in taxable accounts. (Because they did most of their asset accumulation before tax-advantaged accounts were widely available.) I've had to reconstruct cost basis starting as far back as the 1950s. While doing that, I've seen a lot of mutual fund capital gain distributions generated by a lot of different causes.

In addition to the tax-inefficiency issue dbr raises about the increasing bond allocation in a near-date target date fund like a 2025 fund...

The thing that makes the Cap Gain Distribution Risk hairs on the back of my neck start tingling about a 2025 target date fund is NOT any repeat of the type of events that occurred in the Vanguard Target Retirement series in 2021. It is just plain life-cycle realities: Starting now, and increasing as the years go on, in aggregate, the shareholders of a target date 2025 fund are going to be more and more likely to
  • retire, quit contributing to the target date fund, and start making withdrawals either to pay for living expenses in retirement or due to RMDs (which, if they don't use, they probably aren't particularly likely to reinvest in the same target date fund in a taxable account. They'd either reinvest in something more tax-efficient or in some other vendor's target date fund because their taxable account is at some other vendor.)
  • die, and have beneficiaries who sell the low-date target date fund in order to buy something more appropriate for their age.
These items add up to a predictable source of increasing pressure for net outflows from the target date fund as it reaches and passes its target date. Increasing outflows increases the possibility of ongoing and increasing capital gain distributions as a target date fund reaches and passes its target date. No weird one-off mutual fund manager decision needed; just plain life-cycle realities.

(Fund flows and their effect on cap gains realized within the fund are complex, so the above "life cycle realities" fund flow pressure isn't the *only* determinant of overall fund flows or cap gan distributions. However, the "life cycle realities" fund flow pressure *is* something that starts predictably shifting in the "outflows" direction as the target date gets near and passes.)
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Re: Vanguard Target Fund Conundrum/Debacle

Post by cas »

ifish100 wrote: Thu Jun 23, 2022 7:36 pm is there a setting on the VG website to display the capital gains on each lot?
Switch your cost basis method to specific id (if it isn't already), wait a couple of days, then look under the Cost Basis area on the website.

However, that is going to show you individual lots only for lots purchased after the law changed in 2010 (covered shares). (And since you turned off reinvestment a long time ago, you may not have any.) The uncovered shares purchased before then are still going to be shown glommed all together.

It also won't work if you have *ever* sold a share of the fund using the average cost basis reporting method.

Before 2010, the law put the responsibility entirely on the individual investor to track cost basis (and the associated unrealized gain/loss) for individual lots. So you would have to reconstruct those records from transaction history or your retained paper statements. And, even then, the IRS provides a mechanism to notify the broker when you want to sell a specific lot, but that is an additional complication. I'm not sure the above sounds like your particular cup of tea.
exodusNH
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Re: Vanguard Target Fund Conundrum/Debacle

Post by exodusNH »

ifish100 wrote: Thu Jun 23, 2022 7:56 pm Exodus... if you are correct on that, I will sleep better. The LT cap gains debacle VG subjected some of us to... if they did merge them and thus correcting the mechanism that created the issue.... VG should issue a letter to each of us that was burned, they obviously know who we are, to inform us the debacle will not be repeated because the funds were merged. Maybe because they are under the lawsuit they want to avoid doing that, kind of admitting the wrong doing, not sure.

If this is correct and no other mass exodus is expected, there would seem to be little reason to get rid of it. Until last year there was no problem owning VTTVX in taxable.

Thank you.
They may not actually know who you are. Sometimes the funds are held in aggregate. Your ownership is tracked by your broker, not Vanguard.

If you hold them directly with Vanguard, obviously they have a record of your ownership.

Alex_686 had a lot of great information on the issue. I think that discussion is locked now, but if you want to see the viewpoint of someone who has helped make the sausage, it's pretty interesting and more complicated than anyone on the outside realizes.
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by VanGar+Goyle »

cas wrote: Thu Jun 23, 2022 11:10 am
Curlyhead wrote: Thu Jun 23, 2022 10:43 am [Vanguard is] not giving me a straight answer what capital gains will look like for this year.
Vanguard updates realized cap gains year-to-date for each of their funds monthly on their website, under the Distributions tab for each fund's information page.

e.g. for Target Retirement 2040 (VFORX), realized cap gains through 5/31/2021 is 0.59%. https://investor.vanguard.com/investmen ... tributions

This information is of limited use this time of year ...
Thanks for the pointer. I knew about Estimated supplemental fund distributions, Preliminary capital gains estimates on 11/15/2022, and final Estimated year-end distributions announcements on 12/9/2022. Luckily my funds are safely "Realized gain" negative so far this year. :(
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Re: Vangaruard Target Fund Conundrum/Debacle

Post by markjk »

alex_686 wrote: Thu Jun 23, 2022 11:47 am Now last year was both a rare one-off evet that Vanguard mishandled. This particular situation will never happen again. This general situation is rare. A fair amount of the unrealized capital gains has been realized so even if this class of events were to happen then the distributions will be low. i.e., your barn has already burned to the ground. It is not going to burn down the same way again.
+1

OP, All I'd say is make sure you understand what really happened last year before using it as a reason to change your approach.
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burritoLover
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Re: Vanguard Target Fund Conundrum/Debacle

Post by burritoLover »

Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
retiringwhen
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Re: Vanguard Target Fund Conundrum/Debacle

Post by retiringwhen »

burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
It is a regular occurrence for all TDF funds from all providers. It is structural feature (defect?) of TDF funds that is not fixable by any known approach I know of. Owning TDF funds is just a bad idea if you are capital gains tax sensitive.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by dbr »

retiringwhen wrote: Sat Jun 25, 2022 9:08 am
burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
It is a regular occurrence for all TDF funds from all providers. It is structural feature (defect?) of TDF funds that is not fixable by any known approach I know of. Owning TDF funds is just a bad idea if you are capital gains tax sensitive.
It comes back in general that holding balanced funds including TD funds in taxable accounts is not advised.

It can be that holding TD funds in tax deferred accounts is also not advised if holding the stocks in taxable and the bonds in tax deferred would be a better fit for an individual situation.
retiringwhen
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Re: Vanguard Target Fund Conundrum/Debacle

Post by retiringwhen »

dbr wrote: Sat Jun 25, 2022 9:11 am It can be that holding TD funds in tax deferred accounts is also not advised if holding the stocks in taxable and the bonds in tax deferred would be a better fit for an individual situation.
I have a pretty simple recipe for folks who want the simplicity of TDFs as much as possible, but are sensitive to CG taxes.

1.) Put all tax-deferred accounts in an appropriate TDF fund in all types, Roth, Pre-tax/Traditional, 401K, 457, SIMPLE, etc.
2.) Buy only cash (for EF is desired) and Total Stock Market index funds in taxable.
3.) As the taxable assets increase, this may drive up the investor's AA to be unbalanced toward stocks. If/when this occurs, the investor adjusts one or more of the TDF investments to a lower year TDF fund to move along the AA curve. For example, move from 2040 fund to 2030 regardless of actual retirement target age. This will bring the AA back in balance without tax consequences.

This is very easy to understand and explain, requires minimal math, keeps the maximum amount of simplicity while also being reasonably tax efficient.

If this approach dilutes the investor's ex-US allocation too much, start to buy ex-US funds in the taxable too.

To the OP, my suggestion, is to do the following.

1.) turn off all automatic dividend and CG reinvestments.
2.) put all new taxable money (including distributions from the TDF) in a Total Stock market fund like VTSAX.
3.) when you have room at the most advantageous CG tax rates, sell some of the TDF and reinvest in the VTSAX.
4.) look for tax-loss harvesting opportunities and use them to minimize taxes and maximize re-allocation opportunities.

Eventually, you will have worked your way out of the TDF in taxable with the least damage.

As an aside, unless you are in very high tax brackets (e.g., 20% LTCG with NIIT), the damage is not nearly as bad as many people will lead you to believe. The cost-basis adjustments from CG distributions help (not completely) alleviate the burdens of taxes paid early. In fact, if you are currently in the 0% tax-bracket for capital gains, those distributions have probably permanently avoided future CG taxes.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by billaster »

burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
Kind of a meaningless statement in nominal terms rather than percentage of value. But even in nominal terms, I have been unable to find a capital gains distribution of $1 a share over the past 20 years other than the 2021 event. Can you describe these "big capital gain distributions" you are referring to?

The 2021 distribution was a completely unprecedented and unexpected event.
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burritoLover
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Re: Vanguard Target Fund Conundrum/Debacle

Post by burritoLover »

billaster wrote: Sat Jun 25, 2022 10:10 am
burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
Kind of a meaningless statement in nominal terms rather than percentage of value. But even in nominal terms, I have been unable to find a capital gains distribution of $1 a share over the past 20 years other than the 2021 event. Can you describe these "big capital gain distributions" you are referring to?

The 2021 distribution was a completely unprecedented and unexpected event.
Guess you didn’t search very hard - The Vanguard 2020 TDF had $1.56/share distribution in 2020 which had nothing to with the massive one in 2021.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by billaster »

burritoLover wrote: Sat Jun 25, 2022 7:58 pm
billaster wrote: Sat Jun 25, 2022 10:10 am
burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
Kind of a meaningless statement in nominal terms rather than percentage of value. But even in nominal terms, I have been unable to find a capital gains distribution of $1 a share over the past 20 years other than the 2021 event. Can you describe these "big capital gain distributions" you are referring to?

The 2021 distribution was a completely unprecedented and unexpected event.
Guess you didn’t search very hard - The Vanguard 2020 TDF had $1.56/share distribution in 2020 which had nothing to with the massive one in 2021.
Well, yeah. Vanguard has 12 Target Retirement Funds and the 2020 fund is the only one having a distribution of that size in 2020, which is still tiny compared to their 2021 distribution.

And you want to know why there was a 2020 distribution for that one fund? Because it is a 2020 Retirement Fund so in the year 2020 they reduced their stock allocation as expected by their glide path. That was an entirely expected distribution. It would be the same if you held Total Stock Market in your taxable account and reduced your stock allocation at retirement. No other Target Retirement Fund had distributions anywhere close to that in their 20 year history.

So no, it is not true that "Vanguard's target date funds have had big capital gain distributions (over $1/share)." One fund had a distribution over a dollar in 2020 and that was entirely expected by the prospectus glide path because it is a 2020 retirement fund.
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Re: Vanguard Target Fund Conundrum/Debacle

Post by quietseas »

OP hasn't replied back, I'd want to know what his long term and short term unrealized gains are right now and what his federal and state capital gains tax rates are.

Other than that, surely no one is advocating for using TDFs in taxable accounts except in certain low tax situations? I'd agree it won't matter much for a 70 year old in a 0% cap gains tax rate for the rest of her life. But I wouldn't want someone in their 50s to take away that putting $1M into a TDF for 40-50 years is a good idea. There just are too many unknowns about the future to do that as far as I'm concerned.
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burritoLover
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Re: Vanguard Target Fund Conundrum/Debacle

Post by burritoLover »

billaster wrote: Sat Jun 25, 2022 8:26 pm
burritoLover wrote: Sat Jun 25, 2022 7:58 pm
billaster wrote: Sat Jun 25, 2022 10:10 am
burritoLover wrote: Sat Jun 25, 2022 6:47 am Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event.
Kind of a meaningless statement in nominal terms rather than percentage of value. But even in nominal terms, I have been unable to find a capital gains distribution of $1 a share over the past 20 years other than the 2021 event. Can you describe these "big capital gain distributions" you are referring to?

The 2021 distribution was a completely unprecedented and unexpected event.
Guess you didn’t search very hard - The Vanguard 2020 TDF had $1.56/share distribution in 2020 which had nothing to with the massive one in 2021.
Well, yeah. Vanguard has 12 Target Retirement Funds and the 2020 fund is the only one having a distribution of that size in 2020, which is still tiny compared to their 2021 distribution.

And you want to know why there was a 2020 distribution for that one fund? Because it is a 2020 Retirement Fund so in the year 2020 they reduced their stock allocation as expected by their glide path. That was an entirely expected distribution. It would be the same if you held Total Stock Market in your taxable account and reduced your stock allocation at retirement. No other Target Retirement Fund had distributions anywhere close to that in their 20 year history.

So no, it is not true that "Vanguard's target date funds have had big capital gain distributions (over $1/share)." One fund had a distribution over a dollar in 2020 and that was entirely expected by the prospectus glide path because it is a 2020 retirement fund.
2020 is not the only retirement fund year that adjusts its glidepath in the given year. So Vanguard hasn’t had any capital gains in TDFs over $1/share ever, well except for the last two years but that means never lol
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Re: Vanguard Target Fund Conundrum/Debacle

Post by billaster »

burritoLover wrote: Sat Jun 25, 2022 8:54 pm 2020 is not the only retirement fund year that adjusts its glidepath in the given year. So Vanguard hasn’t had any capital gains in TDFs over $1/share ever, well except for the last two years but that means never lol
Here is your claim: "Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event."

Among the dozen existing Target Retirement Funds, distributing almost 200 years of capital gains distributions, exactly one in 2020, had a distribution over one dollar, which isn't surprising for a fund that reaches its retirement date. And even this one case was a small distribution compared to what happened to every single fund in 2021, less than 5%. For example, the 2045 fund had a maximum capital gains distribution of 0.5% over its history. In 2021 it distributed 18%, 36 times expected.

So your notion that Target Retirement funds have a history of big capital gains distributions simply is not true. They are typically less than 1% per year.
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burritoLover
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Re: Vanguard Target Fund Conundrum/Debacle

Post by burritoLover »

billaster wrote: Sat Jun 25, 2022 9:41 pm
burritoLover wrote: Sat Jun 25, 2022 8:54 pm 2020 is not the only retirement fund year that adjusts its glidepath in the given year. So Vanguard hasn’t had any capital gains in TDFs over $1/share ever, well except for the last two years but that means never lol
Here is your claim: "Vanguard's target date funds have had big capital gain distributions (over $1/share) before even if you exclude this "one-time" event."

Among the dozen existing Target Retirement Funds, distributing almost 200 years of capital gains distributions, exactly one in 2020, had a distribution over one dollar, which isn't surprising for a fund that reaches its retirement date. And even this one case was a small distribution compared to what happened to every single fund in 2021, less than 5%. For example, the 2045 fund had a maximum capital gains distribution of 0.5% over its history. In 2021 it distributed 18%, 36 times expected.

So your notion that Target Retirement funds have a history of big capital gains distributions simply is not true. They are typically less than 1% per year.
2045 is around 90% stocks. And barely on the glidepath - not hard to minimize them then.

When do you think the large capital capital gains would be more destructive in taxable - 25 years from retirement or when you have your entire accumulation contributions in it at retirement?

And the statement is accurate. They have had big distributions besides the 2021 snafu. $1 mil in the 2020 TDF in taxable in 2020 would be $45.5k in capital gain distributions - yikes. Look at some of the competitor funds and see if that is normal. And 2020 was the only year I looked at.
cas
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Re: Vanguard Target Fund Conundrum/Debacle

Post by cas »

Re: the above discussion between burritolover and billaster...

Here is this year's data, which probably gets at the points you are both trying to make, plus is (mildly***) actionable (since it is this year's data).

I present this data in the hopes that it might lead to a discussion that is more actionable/educational for newbies to taxable investing than the irritated sniping that these target date threads usually devolve into.

Realized cap gain percentages, year-to-date through 5/31/2022, for the Vanguard Target Retirement series (published in the Distributions section for each fund on the Vanguard web site):

Incm: 1.14%
2015: 2.40%
2020: 1.78%
2025: 0.94%
2030: 0.68%
2035: 0.71%
2040: 0.59%
2045: 0.68%
2050: 0.34%
2055: 0.17%
2060: 0%
2065: -0.04%

Discuss:
  • Does anyone see a pattern?
  • If so, what underlying causes might be leading to that pattern?
  • Would you consider this data to be expected or unexpected, normal or unusual, troubling or ho-hum?
  • What additional data would you need to determine whether your possible cause was really a factor in these particular numbers?
Off the top of my head, I can think of 6 or 7 possible contributing causes, so don't stop your thinking with just one possible cause.


***comment about "(mildly) actionable": Do NOT make any decisions just based on what the absolute % is through May. Realized gain % can change *a lot*, in both directions, before the end of the year, for all kinds of unpredictable reasons.
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grabiner
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Re: Vanguard Target Fund Conundrum/Debacle

Post by grabiner »

cas wrote: Sun Jun 26, 2022 8:31 am Re: the above discussion between burritolover and billaster...

Here is this year's data, which probably gets at the points you are both trying to make, plus is (mildly***) actionable (since it is this year's data).

I present this data in the hopes that it might lead to a discussion that is more actionable/educational for newbies to taxable investing than the irritated sniping that these target date threads usually devolve into.

Realized cap gain percentages, year-to-date through 5/31/2022, for the Vanguard Target Retirement series (published in the Distributions section for each fund on the Vanguard web site):

Incm: 1.14%
2015: 2.40%
2020: 1.78%
2025: 0.94%
2030: 0.68%
2035: 0.71%
2040: 0.59%
2045: 0.68%
2050: 0.34%
2055: 0.17%
2060: 0%
2065: -0.04%

Discuss:
  • Does anyone see a pattern?
  • If so, what underlying causes might be leading to that pattern?
  • Would you consider this data to be expected or unexpected, normal or unusual, troubling or ho-hum?
  • What additional data would you need to determine whether your possible cause was really a factor in these particular numbers?
Target-date funds need to make transactions that reduce their stock allocation, both because a rising market forces rebalancing to keep the same allocation, and because they change to more conservative allocations. Whether this leads to a capital gain depends on whether the fund has to sell its stock funds.

The post-retirement target-date funds regularly have the largest capital gains. Since most investors in those funds are already retired, the funds are likely to have net withdrawals, and thus must sell stock even if they were to keep the same allocation. In addition, the glidepath in those last few years is relatively steep, requiring more stock sales. Target Retirement Income may also have net withdrawals (although I would expect that these are offset by rollovers from retirees' 401(k) plans), but it will have less in capital gains since it does not need to change its allocation.

Conversely, the pre-retirement target-date funds are likely to have net inflows, since investors in those funds are saving for retirement. They can use the inflows to buy more bonds when needed, rather than selling stock, and thus will have relatively low capital gains. (The reason that gains are not zero is that these funds probably did need to sell some stock at the January 2022 market peak.)

So I would expect the 2022 data to be relatively normal. If the market continues to fall, there will be fewer capital gains in the future, both during and after the bear market. During the bear market, the funds will be buying stocks rather than selling; after the bear market, the funds will have to start selling stocks, but they are more likely to have stocks bought near the market peak which have capital losses.
Wiki David Grabiner
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