As we mark the 20^th anniversary of the Vanguard Target Retirement Funds’ inception, our overarching goal has remained constant: to help provide investors with a world class target-date fund (TDF) solution that is low-cost, straightforward, highly diversified, and durable.

Over the past decade, TDFs have become a cornerstone of U.S. retirement plans and the percentage of investors using these funds in the defined contribution (DC) space continues to grow.¹ The increased availability of TDFs, combined with managed account advice within retirement plans, demonstrates how plan sponsors have prioritized helping investors take a more comprehensive approach to financial well-being. While the increasing popularity of these funds is more understood today, that wasn’t always the case. In this article, we’ll look at the history of TDFs, their impact on the retirement landscape, and how, together with our plan sponsors, we’ve meaningfully improved retirement outcomes for our investors.

As we reflect on the past 20 years, we’re extremely proud that Vanguard Target Retirement Funds are trusted by more plans and participants than any other TDF provider, with more than $1 trillion in assets under management representing more than 15 million investors.²  Because saving for retirement is one of the most important financial goals for many Americans—if not the most important—we’re committed to providing the best retirement products and solutions as we continually strive to return value to our investors.

TDFs have become the primary choice for a DC plan’s qualified default investment alternative (QDIA) since the passage of the Pension Protection Act of 2006. The percentage of plans using a TDF as their default fund grew from 71% in 2013 to 90% in 2022.¹ TDFs now account for 40% of all plan assets (compared to only 19% in 2013) and 63% of all contributions were directed to TDFs (compared to 34% in 2013).¹ Additionally, the space continues to grow regardless of the market environment. For example, despite the market volatility of 2022, TDFs saw more than $153 billion in new net cash flow.³ These statistics make it hard to deny that TDFs have already left their mark on the retirement savings landscape. But their ubiquity raises an important question: Have they delivered for investors?

From the start, TDFs were designed to simplify the investment process and appeal to investors who felt overwhelmed by the task of funding their own retirement. These were individuals who, prior to the Pension Protection Act (PPA) of 2006, assumed all responsibility (and risk) for managing the assets within their DC plans—despite having little to no knowledge about investing. In addition, the retirement savings strategies at that time did not account for the fact that many people live years beyond retirement and could potentially face the risk of running out of money later. There was a substantial need to combine the benefits of broad diversification across asset classes with professional management that was based on solid investment practices. TDFs helped fill that void.

The role of TDFs is to help deliver reasonable returns for investors without subjecting them to undue risk relative to the broad financial markets. Consequently, one of the primary challenges many retirement savers face is constructing a portfolio with the appropriate mix of higher- and lower-risk assets that matches the investor’s time horizon, retirement goals, and other considerations. Because retirement savings decisions are so important for so many people, designing a glide path that represents age-appropriate levels of risk is a primary goal. Once the individual invests or is defaulted into a TDF, the fund’s portfolio manager oversees all decisions about portfolio construction and ongoing rebalancing. As a testament to the increasing value that TDFs bring to retirement portfolios, investors turned to professionally managed allocations in record numbers in 2022, according to Vanguard research.

Two trends in particular offer encouraging evidence that TDFs, coupled with plan features such as autoenrollment and autoescalation, have benefitted investors. The first trend is a reduction in extreme equity allocations—participants with either 100% or 0% in equities—and, with it, an increase in investors making more age-appropriate asset allocations. The percentage of investors with no allocation to equities has fallen from 13% when the PPA was passed in 2006 to 3% in 2022.⁴ The percentage of investors with a 100% allocation to equities has declined from 19% to 4% over the same period.⁴

The second trend is the positive impact on investor outcomes. Compared to do-it-yourself investors who make their own investment choices, TDF investors tend to have significantly less dispersion in outcomes and a more consistent risk-return experience with their retirement savings. When viewing annualized returns over a five-year period, professionally managed portfolios—specifically those that include TDFs and managed account advisory services—are less likely to see variability in returns.⁴ At the same time, investors who create their own asset allocations are more likely to hold extreme portfolios. Finally, Vanguard research has found that as TDF use increases, portfolio trading decreases.¹

At Vanguard, the end investor has always been at the heart of our TDF design. We believe the most successful investors are those who have a retirement portfolio that reflects their own circumstances and risk tolerances. We started by asking how we could best help investors save enough for retirement, while ensuring that they could keep more of their hard-earned money by continually lowering the cost of investing over time. Based on Vanguard research, retirement account balances among TDF users have steadily increased over the last 10 years.¹

We’ve always taken a proactive approach to navigating the complexities that result from the ongoing evolution of retirement programs. We supported regulators as they made decisions related to the PPA and target-date adoption within QDIAs. When many plan sponsors were shifting from defined benefit to DC plans, we were there to communicate those complex scenarios: advocating for automatic solutions, such as default enrollment, automatic savings features, and the introduction of managed account advisory services to help reduce fiduciary concerns. Rather than trying to change the investors’ behavior, we focused on partnering with plan sponsors to enhance retirement plan design. 

“When it comes to investing, straightforward and low costs have always been a tough combination to beat, and Vanguard’s target-date series sets the standard in both features. … This series is emblematic of Vanguard. It features low-cost, broadly diversified index funds to gain efficient exposure to global stocks and bonds. It’s devoid of any tactical shifts, and any changes to the glide path or asset allocation are well-vetted with a long-term mindset by the committee of senior Vanguard investors.” (Morningstar, 2023)⁵

We started the Vanguard Target Retirement Funds series because we believed they best captured market risk and returns at the lowest possible cost, helping to give investors the best chance of generating lasting retirement income. In partnership with our plan sponsors, we've made great progress in changing how people invest for retirement. The low-cost index funds used in Vanguard Target Retirement Funds can be easier for sponsors and participants to understand than those that combine active funds or other financial instruments and they may typically provide reduced exposure to market volatility and more consistent returns. As more plan sponsors have added TDFs, the index fund approach has grown in usage and adoption, which is a win for all investors. In part, federal laws like the PPA and other regulations have helped pave the way for greater usage of TDFs. Plan sponsors continue to display a strong preference for lower-cost target-date strategies⁴, which benefit all parties since they result in higher account balances for participants who invest with us. This is just one of the ways we help investors build enough wealth to increase the likelihood of their retirement success.

At Vanguard, we never stand still and always look for ways to improve outcomes, increase personalization, improve ease of use, and lower costs for our investors. As a QDIA, TDFs have simplified asset allocation and have shown the ability to meaningfully improve retirement outcomes for millions of investors. While we can all take pride in the strides that have been made over the past two decades with respect to broad TDF adoption and plan enhancements, there is still more work to be done. Investors are looking for a more integrated approach to financial well-being—one that accounts for their different needs and wants while in retirement, and an increasing number of investors are looking for help converting their savings into retirement income. The right retirement income solution can also mean participants keep their assets in plans longer. Just as we were there to help plan sponsors navigate the complexities of finding the right plan design before and after the PPA, we look forward to the challenges and opportunities that will arise from the evolving retirement landscape. 

• Highlighting the value of managed portfolios (article, issued September 2023)
• How investor behavior factors into our TDF portfolio plan (Q&A, issued August 2023)
• How America Saves 2023 (115-page PDF, issued June 2023)