For Institutional and Accredited Investor Use Only. Not for Public Distribution.
Target-date fundsLaying a critical foundation for retirement successJohn Croke, CFAHead of Multi-Asset Product Management, The Vanguard Group
15th FIAP International Seminar, Mexico City
October 30, 2017
2For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
• A refresher on target-date fund design
• Reminding ourselves why TDFs exist in the first place
• Solving the decumulation riddle – a global quest
• Focusing on the things you can actually control
• You can never invest your way out of a savings deficit
Agenda
3For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Melbourne
Sydney
Brisbane
Singapore
TokyoValley Forge
London
Paris
Amsterdam
Hong Kong
Zurich
Toronto
CharlotteScottsdale
Beijing
Washington D.C.
Shanghai
Mexico City
Our mission
To take a stand for all investors, to treat them fairly,
and to give them the best chance for investment success.
Source: The Vanguard Group, Inc., as of August 31, 2017, except number of offices, which is as of October 2, 2017. Asset figures are in USD.
$4.6 trillion under management
371 mutual funds and ETFs
20 million clients in 170 countries
15,000 employees
18 offices
4For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1994 2017Q2
Asse
ts u
nd
er
ma
na
ge
me
nt
in $
B
Annual target-date assets under management since 1994
Vanguard is the global leader in target-date funds
Vanguard Fidelity Investments
BlackRock T. Rowe Price
JPMorgan Other
⅓60%
90%
Industry AUM
Industry cash flow
since 2016
Industry index-based
cash flow since 2016
Sources: Vanguard and Morningstar, as of June 30, 2017. Sources: Vanguard, Morningstar, company public filings, as of June 30, 2017. Figures based on U.S. funds.
5For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
A refresher on target-date fund design
6For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
• Long-term investors are rewarded for taking market risk
• Total wealth includes both financial assets and human capital
• As human capital declines with age, investors should take less risk in their financial assets
• A well-designed target-date fund should be built on both sound financial theory and investor behavior
The foundational principles of target-date fund design
7For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Long-term investors are rewarded for taking market risk
-60%
-40%
-20%
0%
20%
40%
60%
1-Year 3-Year 5-Year 10-Year 20-Year 30-Year 40-Year
Range of excess returns Average excess return
Historical equity risk premium over different time periods, 1926–2016
An
nu
alized
exce
ss s
tock r
etu
rn v
ers
us r
etu
rn
for
no
min
al b
on
ds
Notes: Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. U.S. stock market returns are represented by the
Standard & Poors 90 from 1926 through March 3, 1957; the Standard & Poors 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005; the MSCI US Broad Market Index from April 23, 2005,
through June 2, 2013; and the CRSP US Total Market Index thereafter. U.S. bond market returns are represented by the Standard & Poors High Grade Corporate Index from 1926 to 1968; the Citigroup High Grade Index from 1969 to 1972;
the Lehman Brothers US Long Credit AA Index from 1973 to 1975; the Barclays Capital U.S. Aggregate Bond Index from 1976 to 2009; and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.
Source: Vanguard calculations, based on data from Standard & Poor’s, Wilshire, MSCI, CRSP, Citigroup, and Barclays.
8For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
As human capital declines with age, investors should take less risk in their financial assets
Source: Vanguard.
Human capital
An individual’s opportunity
to earn and save money.
This diminishes over time.
Financial capital
An individual’s total saved
assets.
Age 25 Age 45 Age 65 Age 85 Age 100
Retirement
date
Human
capital +
financial
capital =
total
economic
wealth
9For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
0
20
40
60
80
100%
25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Age
Equity
allo
cation
Young Transition Retirement Late retirement
Younger than 40
Up to age 40 will have a
high equity allocation (90%)
41–65
Gradually moves to a
50% stocks/50% bonds
allocation
at age 65
66–72
Shift
inflation
hedge mix
away from
stocks and
toward
TIPS
72+
Modest (30%) continued
exposure to stocks
Phase I Phase II Phase III Phase IV
Target date*
The glide path sets the exposure to risky assets (i.e. equities) throughout the investor’s life cycle
* Target date is the year stated in the fund name. Target-date fund allocations are based on a projected retirement age of 65.
10For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
“To retirement” TDFs… “Through retirement” TDFs…
Perc
enta
ge
allo
cation to r
isky a
ssets
Age 65
The glide path “de-risks” to the point of retirement
Age 65Perc
enta
ge
allo
cation to r
isky a
ssets
The glide path “de-risks” through the point of
retirement
The rationale for “to” TDFs
• Human capital is zero at retirement
• Many participants withdraw assets from their employer retirement plans at retirement
The rationale for “through” TDFs
• Empirical data showing DC wealth is not converted to retirement income until members are in their early 70s
• Desire to capture more of the equity risk premium before wealth is drawn down
The “to” vs. “through” debate: The intersection of financial theory and observable investor behavior
11For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
0%
20%
40%
60%
80%
100%
Pe
rce
nta
ge
of tr
ad
itio
na
l IR
A h
old
ers
wh
o
ha
d w
ith
dra
wa
ls
Remain in the plan
Rolled over
Held in cash
0%
20%
40%
60%
80%
100%
1 2 3 4 5
Pe
rce
nta
ge
of a
sse
ts
Years after retirement
Source: Retirement distribution decisions among DC participants, Vanguard, October 2016.
Investor behavior drives Vanguard’s “through retirement” approach to its U.S. target-date funds
Yes, 5 years after retirement 75% of assets have left the plan, but…
. . . investors do not withdraw money after rolling over until around age 72
12For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Reminding ourselves why TDFs exist in the
first place
13For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Left to their own devices, many investors arrive at extreme asset allocations
Past performance is not a guarantee of future results.
Source: Vanguard, How America Saves 2017.
Note: Includes a random sample of 1,000 participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk and return, for a net sample of 980 observations. Vanguard defined contribution plan
participants for the five-year period ended December 31, 2016.
Note: U.S. stocks represented by the MSCI US Broad Market Index; U.S. bonds represented by the Barclays U.S. Aggregate Bond Index; International stocks represented by the MSCI All Country World Index ex USA.
Accumulation phase / auto features
Participants younger than 35 years of age
Participants ages 35 to 55
Participants older than 55 years of age
Fiv
e-y
ea
r a
nn
ua
lized
to
tal r
etu
rn
Five-year annualized standard deviation
Fiv
e-y
ea
r a
nn
ua
lized
to
tal r
etu
rn
Five-year annualized standard deviation
TDFs enable average investors to benefit from more efficient risk-return trade-offs
0%
20%
0% 25%
U.S. bonds
Non-U.S. stocks
U.S. stocks
0%
20%
0% 25%
U.S. bonds
Non-U.S. stocks
U.S. stocks
Fiv
e-y
ea
r a
nn
ua
lized
to
tal r
etu
rn
Five-year annualized standard deviation
Fiv
e-y
ea
r a
nn
ua
lized
to
tal r
etu
rn
Five-year annualized standard deviation
14For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Australian bonds
Australian shares
International shares
0%
20%
0% 14%
Self-directed members…Life-cycle members…
A similar story can be seen in Australia’s superannuation system
Past performance is not a guarantee of future results.
Source: How Australia Saves 2017, Vanguard.
Note: Australian shares represented by the S&P/ASX 300 Index; Australian bonds represented by the Bloomberg AusBond Composite 0+ Yr Index; international shares represented by the MSCI World ex-Australia Index. a random sample of
1,000 participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk and return, for a net sample of 980 observations. SunSuper members for the five-year period ended June 30, 2016.
Australianbonds
Australian shares
International shares
0%
20%
0% 14%
Fiv
e-y
ea
r a
nn
ua
lized
tota
l re
turn
Fiv
e-y
ea
r a
nn
ua
lized
tota
l re
turn
Members age <55
Members age 55+
Five-year annualized
standard deviation
Five-year annualized
standard deviation
15For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
What my TDF knows about me….
6%
Personal Identification Number: XXXXXExpected retirement: ~ 2045
What my TDF does not know about me….
16For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Solving the decumulation riddle – a global
quest
17For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
What’s fueling the urgency around “retirement income” and "decumulation"?
Sources: U.S. Census Bureau, World Health Organization, historical returns computed by Vanguard, expected returns are estimated using the Vanguard Capital Markets Model (VCMM). IMPORTANT: The projections or other information generated by Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. Please see the Important information slide for additional information about VCMM.
Demographics
Central & South American population > 65 years
2000
5.5%
2017
7.9%
2050 (est.)
18.7%
Longevity
Life expectancy in years at age 60 for the Americas
2000
20.9
2017
22.8
Lower returns
Annualized returns on a portfolio of 60% stocks / 40% bonds
1926 to 2016
8.5% p.a.
Est. 10-year (median outcome)
5.6% p.a.
18For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Access to guaranteed income in retirement is declining (or in many markets, never existed)
Source: Willis Towers Watson Global Pension Asset Study 2017.
4%
5%
6%
18%
60%
87%
96%
95%
94%
82%
40%
13%
0% 20% 40% 60% 80% 100%
Japan
Canada
Netherlands
UK
United States
Australia
Share of defined contribution versus defined benefit assets across major markets
DC DB
19For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
What factors determine success in decumulation?
Asset allocation Drawdown rate Long-term medical care expenses ($90K / year)
IMPORTANT: The projections or other information generated by Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment
results, and are not guarantees of future results. Results may vary with each use and over time. Please see the Important information slide for additional information about VCMM.
Notes: Salary projections are derived from the Social Security Administration’s Wage Index, an index that accounts for factors like career advancement. The index is grown by 1.1% annually, on a real basis, which is representative of the
U.S. economy’s historical productivity growth. Age-specific contribution rates are derived from How America Saves 2014 (The Vanguard Group, 2014), a report surveying 3 million participants served by Vanguard's recordkeeping business.
Contributions are assumed to start at an average rate of 4.88% at age 25, increasing to an average rate of 9.98% by age 64. Over the employee’s career, the average contribution rate is 7.2%. We assume a company match of $0.50 on the
dollar up to 3%, which is consistent with industry averages. Replacement ratios are drawn from the work of Aon Consulting (with data taken from the U.S. Department of Labor’s Bureau of Labor Statistics “Consumer Expenditure Survey”) to
assign appropriate replacement ratios based on retirees’ age-65 income.
Impact on success in year 35 of retirement from changes to the…
86%82%
91%
76% 74%
61%
30% Equity / 70%Bonds
70% Equity / 30%Bonds
4.50% Withdrawalrate
5.50% Withdrawalrate
In year 9 In years 9 & 10
20For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Focusing on the things you can
actually control
21For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Vanguard’s mission: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success
This mission anchors the design principles of the Vanguard Target Retirement Funds & Trusts:
Source: Vanguard.
Build enduring
investment
portfolios
Help investors reach
their goals through
a holistic approach
Deliver a defendable
solution that is
globally diversified,
transparent, and low
cost
22For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Source: Vanguard.
* Target date is the year stated in the fund name. Target-date fund allocations are based on a projected retirement age of 65.
Transparent, straightforward asset-class exposure
23For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Many moving parts—25+ sub-asset classes
Fewer moving parts—5 index funds
Two different lenses to portfolio construction
Vanguard target-date funds offer the simplicity of an index-oriented, well-diversified portfolio that is strategic and straightforward in its approach. The funds are composed of up to five underlying funds and follow
an easy-to-understand asset allocation glide path. Underlying this simplicity is Vanguard's deep investment expertise, knowledge of the capital markets, and insights into participant behavior.
Sources: Hypothetical target asset allocations per the glide path of a 2015 target-date fund. Sub-asset allocations determined using data from Vanguard and Morningstar as of March 31, 2017.
26.8% Total U.S. stock market index
31.6% Total U.S. bond market index
17.9% Total non-U.S. stock index
13.4% Total non-U.S. bond index
10.3% Short-term inflation-protected securities index
U.S. stocks U.S. nominal bonds
8.3% Large growth 13.8% Treasury/Agency
9.8% Large value 6.6% Government mortgage-backed
0.8% Large blend 8.7% Corporate
2.7% Mid/Small growth 1.8% Foreign
3.5% Mid/Small value 0.6% Commercial mortgage/Asset-backed
0.6% Mid/Small blend 0.1% Other
1.1% U.S. REITs
International stocks
7.4% Europe
4.9% Pacific
3.1% Emerging markets
1.2% North America
0.5% Middle East/Other
0.7% Non-U.S. REITs
International nominal bonds
7.4% Europe
3.8% Pacific
1.1% North America
0.5% Emerging markets
0.6% Middle East/Other
10.3% Short-term TIPS
24For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
You can never invest your way out of a
savings deficit
25For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
Meaningful changes in glide path design only have a marginal impact on success in decumulation…
“Conservative” glide path Baseline glide path “Aggressive” glide path
91% 92% 92%
Probability of positive balance at age 95
IMPORTANT: The projections or other information generated by Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment
results, and are not guarantees of future results. Results may vary with each use and over time. Please see the Important information slide for additional information about VCMM.
Notes: Salary projections are derived from the Social Security Administration’s Wage Index, an index that accounts for factors like career advancement. The index is grown by 1.1% annually, on a real basis, which is representative of the
U.S. economy’s historical productivity growth. Age-specific contribution rates are derived from How America Saves 2014 (The Vanguard Group, 2014), a report surveying 3 million participants served by Vanguard's recordkeeping business.
Contributions are assumed to start at an average rate of 4.88% at age 25, increasing to an average rate of 9.98% by age 64. Over the employee’s career, the average contribution rate is 7.2%. We assume a company match of $0.50 on the
dollar up to 3%, which is consistent with industry averages. Replacement ratios are drawn from the work of Aon Consulting (with data taken from the U.S. Department of Labor’s Bureau of Labor Statistics “Consumer Expenditure Survey”) to
assign appropriate replacement ratios based on retirees’ age-65 income.
100%
90%
80%
40%
30%
20%
Sto
ck a
llo
ca
tio
n
Time to retirement
26For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
…however, there is much greater power in the savings rate
8.8%
IMPORTANT: The projections or other information generated by Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment
results, and are not guarantees of future results. Results may vary with each use and over time. Please see the Important information slide for additional information about VCMM.
Notes: Salary projections are derived from the Social Security Administration’s Wage Index, an index that accounts for factors like career advancement. The index is grown by 1.1% annually, on a real basis, which is representative of the
U.S. economy’s historical productivity growth. Age-specific contribution rates are derived from How America Saves 2014 (The Vanguard Group, 2014), a report surveying 3 million participants served by Vanguard's recordkeeping business.
Contributions are assumed to start at an average rate of 4.88% at age 25, increasing to an average rate of 9.98% by age 64. Over the employee’s career, the average contribution rate is 7.2%. We assume a company match of $0.50 on the
dollar up to 3%, which is consistent with industry averages. Replacement ratios are drawn from the work of Aon Consulting (with data taken from the U.S. Department of Labor’s Bureau of Labor Statistics “Consumer Expenditure Survey”) to
assign appropriate replacement ratios based on retirees’ age-65 income.
Reduced savings rate Baseline savings rate Increased savings rate
86% 92% 95%
Probability of positive balance at age 95
7.2%5.7%
27For Institutional and Accredited Investor Use Only. Not for Public Distribution.
15th FIAP/AMAFORE International Seminar
The information contained herein is for educational purposes only and does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.
All investing is subject to risk, including the possible loss of the money you invest. Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the target-date fund is not guaranteed at any time, including on or after the target date.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
© 2017 The Vanguard Group, Inc. All rights reserved.
Important information