Vanguard Retirement Savings Master Trust

Transcription

1 Annual Report December 31, 2016 Vanguard Retirement Savings Master Trust

2 Vanguard s Principles for Investing Success We want to give you the best chance of investment success. These principles, grounded in Vanguard s research and experience, can put you on the right path. Goals. Create clear, appropriate investment goals. Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost. Discipline. Maintain perspective and long-term discipline. A single theme unites these principles: Focus on the things you can control. We believe there is no wiser course for any investor. Contents Your Trust s 2016 Total Returns 1 Chairman s Letter 2 Advisor s Report 4 Portfolio Profile 6 Performance Summary 7 Financial Statements 9 Glossary 20 Please note: The opinions expressed in this report are just that informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus. See the Glossary for definitions of investment terms used in this report. About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.

3 2016 Total Returns 1 Periods Ended December 31, 2016 One Year Three Years Five Years Vanguard Retirement Savings Master Trust 2.18% 2.18% 2.25% Stable Value Funds Average Returns are gross of investment management fees and net of contract fees. 2 Source: Hueler Analytics Stable Value Pooled Fund Universe. This is an equal-weighted total return average across all participating funds in the Hueler Universe and is net of contract fees and gross of stable value management fees. Hueler s data are copyrighted and are not for reproduction or redistribution. 1

4 Chairman s Letter Dear Trust Participant, Bill McNabb Chairman and Chief Executive Officer The period began with steep declines in commodity prices and sluggish global economic growth, which triggered a move toward less risky assets, including Treasuries. The Federal Reserve seemed less inclined to raise interest rates as it became unclear whether inflation and unemployment targets would be realized. The United Kingdom s June vote to leave the European Union further clouded the outlook. However, market sentiment improved in the second half of the year. U.S. growth shot up in the third quarter. The economy added 156,000 jobs in December and wages increased 2.9%. The unemployment rate finished at 4.7%. The solid figures caused the dollar to strengthen against some currencies. They also played a part in the Fed s decision to raise the federal funds rate to between 0.50% and 0.75%, only the second hike in a decade. Those developments and the prospect of more spending on infrastructure, greater deregulation, and possible changes in the federal tax code under a new administration helped fuel a rally in riskier assets that carried into The broad taxable bond market, representative of the investments supporting the Retirement Savings Master Trust s contracts, lost 2.98% during the fourth quarter but returned 2.65% for the year, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index. 2

5 The performance of the Trust s supporting assets conservative, high-credit-quality bond portfolios (as defined by nationally recognized rating agencies) is reflected in the Trust s market value/book value (MV/BV) ratio. After the positive performance of the bond markets through the fall, this ratio rose to % as of September 30, However, because of the fourthquarter decline in bonds, it ended the year at %. The total return of the Trust, determined by its investments average performance over time and current yield, remained ahead of the stable value funds average as reported by Hueler Analytics. The Vanguard Retirement Savings Master Trust can serve as a conservative option in a carefully structured investment plan. By emphasizing high credit quality and diversification, the Trust seeks to provide a relatively stable return from current income with no change in principal value. It has accomplished these objectives through changing and challenging markets. Thank you for entrusting your assets to Vanguard. Sincerely, F. William McNabb III Chairman and Chief Executive Officer March 31, 2017 Market Barometer Average Annual Total Returns Periods Ended December 31, 2016 One Three Five Year Years Years Stocks Russell 1000 Index (Large-caps) 12.05% 8.59% 14.69% Russell 2000 Index (Small-caps) Russell 3000 Index (Broad U.S. market) FTSE All-World ex US Index (International) Bonds Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) 2.65% 3.03% 2.23% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 2.07% 1.18% 1.36% 3

6 Advisor s Report Vanguard Retirement Savings Master Trust performed well against the average stable value fund. 1 It returned 2.18% both for the year ended December 31, 2016, and on an average annual basis over the past three years. Management of the Trust The assets supporting the Retirement Savings Master Trust s contracts are managed conservatively. They are held principally in mutual funds that are reserved for stable value funds, and they have an average credit quality rating of at least Aa2. Before the fourth quarter, U.S. bond prices were fueled by the weakening outlook on global growth and slowerthan-expected U.S. economic growth. With the rise in yields, fourth-quarter returns were negative. However, the total return of these investments diversified among U.S. Treasury securities, highquality mortgage-backed securities, corporate bonds, and asset-backed securities was positive for the year. The Trust s market value/book value (MV/ BV) ratio, which reflects the returns of the assets supporting the Trust s contracts, increased from % as of December 31, 2015, to % as of September 30, 2016, although it then declined to % by year-end. Following the increase in the target federal funds rate in December, U.S. Treasury yields for 2-year notes rose to 1.19% as of December 31 (from 0.76% as of the end of September) and 1.93% for 5-year notes (from 1.15%). The Trust s gross yield, influenced by current interest rates as well as the MV/BV ratio, was 2.36% as of December 31, It rose modestly to 2.42% as of September 2016 and then trended down to 2.29% by year-end. The ratio of total expenses to average net assets declined from 0.23% in 2014 to 0.22% in 2015 and 0.21% in 2016 because of a decline in average wrap fees. The Trust remains diversified across nine wrap providers. There was only one change in the credit ratings of the providers during the year. In April, Moody s Investors Services upgraded the rating of State Street Bank and Trust Company from A1 to Aa3. The agency stated that, according to its methodology, the current liability structure of the bank s balance sheet has lowered its potential loss severity. The average credit quality of the Trust remains at Aa1. As reported last year, the Trust held some assets in Investor Shares of Vanguard Prime Money Market Fund to provide liquidity for participant transactions. Because of new SEC money market reforms this year, these investments 4 1 Source: Hueler Analytics Stable Value Pooled Fund Universe.

7 were transitioned to shares of Vanguard Federal Money Market Fund during the third quarter of Looking ahead We continue to work with our issuers and to position the assets supporting the Trust s contracts to provide protection from major market risk. Through changes in the investment and stable value markets, Vanguard Retirement Savings Master Trust continues to provide a conservative investment option that helps protect principal. We look forward to reporting to you again next year. Susan F. Graef, CFA, Principal Paul M. Jakubowski, Principal Vanguard Fiduciary Trust Company March 31,

8 Retirement Savings Master Trust Portfolio Profile As of December 31, 2016 Financial Attributes Number of Contract Issuers 9 Gross Spot Yield 2.29% Average Duration 2.78 MV/BV Ratio % Average Quality Aa1 Investments (in millions) $20,185 Distribution of Investments 1 Synthetic Investment Contracts Constant Duration Contracts % Finite-Term Contracts 0.0 Traditional Investment Contracts 3.3 Cash Investments 5.5 Total 100.0% Distribution by Duration 3 Under 1 Year 16.3% 1 to 3 Years to 5 Years to 10 Years 23.3 Over 10 Years 0.2 Total 100.0% Synthetic Underlying Fund Exposure 3 Vanguard Institutional Short-Term Bond Fund 36.6% Vanguard Institutional Intermediate-Term Bond Fund 35.6 Prudential Conservative Intermediate Bond Fund 6.1 New York Life Collective Investment Trust 4.3 Met Life Intermediate Separate Account 4.6 Met Life Short Separate Account 3.9 Total 91.1% Distribution by Sector 3 Corporate 22.2% Treasury 19.5 Asset-Backed 16.4 Pass-Through MBS 14.6 Agency 8.7 Foreign 6.7 Cash Equivalent 6.3 CMBS 2.3 Traditional Contracts 3.3 Total 100.0% Investment Focus Distribution by Credit Quality 4 Average Maturity Short Med. Long Government 42.4% Aaa 21.8 Aa1 6.1 Aa2 3.8 Aa3 8.2 A1 3.7 A2 6.4 A3 7.6 Total 100.0% Credit Quality High Medium Low 1 Based on total fund book value. 2 Contracts for which there is no set maturity date; each can be terminated after providing 60 days notice. 3 Based on total fund market value. 4 Credit-quality ratings for each issue are obtained from Moody s Investor s Service (Moody s), Fitch Ratings (Fitch), and Standard & Poor s (S&P). When ratings from all three agencies are available, the median rating is used. When ratings are available from only two agencies, the lower rating is used. When only one rating is available, that rating is used. Percentages based on total fund market value. See the Glossary for definitions of investment terms used in this report. 6

9 Retirement Savings Master Trust Performance Summary All of the returns in this report represent past performance, which cannot be used to predict future returns that may be achieved by the Master Trust. An investment in the Master Trust is neither insured nor guaranteed by the U.S. government nor by Vanguard, and there is no assurance that the Master Trust will be able to maintain a stable net asset value of $1 per unit. Annual Total Returns (%): December 31, 2006 December 31, 2016 VRST Stable Value Master Funds Trust 1 Average % 4.94% Average Annualized Returns Final Value Periods Ended December 31, 2016 of a $10,000 One Year Five Years Ten Years Investment 3 VRST Master Trust % 2.25% 3.04% $13,497 Stable Value Funds Average ,149 1 Returns are gross of investment management fees and net of contract fees. 2 Source: Hueler Analytics Stable Value Pooled Fund Universe. This is an equal-weighted total return average across all participating funds in the Hueler Universe and is net of contract fees and gross of stable value management fees. Hueler s data are copyrighted and are not for reproduction or redistribution. 3 Growth from January 1, 2007, through December 31, Note: See Financial Highlights table for income information for the Master Trust for the past five years. For Vanguard Retirement Savings Trust unitholders, see the Financial Highlights in the insert for income information for the past five years. 7

10 Retirement Savings Master Trust The Value of Investing for the Long Term: December 31, 2006 December 31, 2016 This chart presents the growth of a hypothetical $10,000 investment made in the Master Trust ten years ago. $16,000 13, ,000 8

11 Retirement Savings Master Trust Financial Statements Schedule of Investments As of December 31, 2016 This Statement provides a detailed listing of the Trust s holdings, including each contract s value on the last day of the reporting period. Investments are grouped and subtotaled by type of investment (traditional contracts issued by insurance companies and banks, synthetic investment contracts, and short-term investments). The net value of other assets and liabilities is added to the value of Total Investments to calculate the Trust s Net Assets. Investments Adjustment Issuer Rating: at Fair to Contract Contract S&P/Moody s Interest Maturity Value Value Value VRST Master Trust (unaudited) Rate Date 1 ($000) ($000) ($000) Investment Contracts (94.9%) Traditional Contracts Issued by Insurance Companies and Banks (3.3%) Metropolitan Life Insurance Co. AA-/Aa % 7/6/18 120,973 (1,262) 119,711 Metropolitan Life Insurance Co. AA-/Aa % 2/7/17 54,141 (28) 54,113 Metropolitan Life Insurance Co. AA-/Aa % 4/21/17 23,094 (33) 23,061 Metropolitan Life Insurance Co. AA-/Aa % 12/14/18 50,887 (836) 50,051 Metropolitan Life Insurance Co. AA-/Aa % 9/27/19 101,605 (1,117) 100,488 Metropolitan Life Insurance Co. AA-/Aa % 7/6/18 5,928 (62) 5,866 New York Life Insurance Co. AA+/Aaa 2.250% 11/16/20 101,336 3, ,588 New York Life Insurance Co. AA+/Aaa 2.050% 10/12/21 126,981 (1,451) 125,530 New York Life Insurance Co. AA+/Aaa 1.690% 12/17/18 76,706 1,906 78,612 Total Traditional Contracts Issued by Insurance Companies and Banks 661, ,020 Wrap Investments Contracts Adjustment Issuer Rating: at Fair at Fair to Contract Contract S&P/Moody s Interest Value Value Value Value (unaudited) Rate ($000) ($000) ($000) ($000) Synthetic Investment Contracts (91.6%) American General Life Insurance Co. (8.1%) A+/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 874,243 (3,042) 871,201 Vanguard Institutional Short-Term Bond Fund 3 763,776 (2,657) 761,119 Bank of Tokyo Mitsubishi (11.4%) A+/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,081,272 (6,089) 1,075,183 Vanguard Institutional Short-Term Bond Fund 3 1,215,452 (6,844) 1,208,608 JPMorgan Chase Bank (12.1%) A+/Aa % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,038,653 (12,898) 1,025,755 Vanguard Institutional Short-Term Bond Fund 3 1,431,073 (17,770) 1,413,303 9

12 Retirement Savings Master Trust Wrap Investments Contracts Adjustment Issuer Rating: at Fair at Fair to Contract Contract S&P/Moody s Interest Value Value Value Value (unaudited) Rate ($000) ($000) ($000) ($000) Metropolitan Life Insurance Co. (8.6%) AA-/Aa % 2 The Metropolitan Life Separate Account Trust 3 943, (3,335) 940,639 The Metropolitan Life Short Separate Account Trust 3 796, (2,814) 793,434 New York Life Insurance Co. (4.4%) AA+/Aaa 2.644% 2 The New York Life Trust Company Vanguard Synthetic GIC Collective Investment Trust 4 882,685 (88) (6,476) 876,121 Prudential (6.8%) AA-/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 789,194 (8,370) 780,824 Vanguard Institutional Short-Term Bond Fund 3 601,913 (6,383) 595,530 Prudential (6.1%) AA-/A % 2 Prudential Core Conservative Intermediate Bond Fund 5 1,240,221 (24,857) 1,215,364 State Street Bank & Trust (13.2%) AA-/Aa % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,335,755 (14,041) 1,321,714 Vanguard Institutional Short-Term Bond Fund 3 1,342,686 (14,114) 1,328,572 Transamerica Premier Life (12.6%) AA-/Aa % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,271, (11,162) 1,260,287 Vanguard Institutional Short-Term Bond Fund 3 1,286, (11,293) 1,275,033 United of Omaha (8.3%) AA-/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 860,963 (8,671) 852,292 Vanguard Institutional Short-Term Bond Fund 3 816,669 (8,225) 808,444 Total Synthetic Investment Contracts 18,572, (169,041) 18,403,423 Total Investment Contracts 19,233, (168,672) 19,065,443 10

13 Retirement Savings Master Trust Wrap Investments Contracts Adjustment Issuer Rating: at Fair at Fair to Contract Contract S&P/Moody s Interest Value Value Value Value (unaudited) Rate ($000) ($000) ($000) ($000) Short-Term Investments (5.6%) Vanguard Federal Money Market Fund-Investor Shares 6 AA/Aa % 1,119,916 1,119,916 Total Investments (100.5%) 20,353, (168,672) 20,185,359 Other Assets and Liabilities Net (0.5%) (103,986) Net Assets (100%) 20,081,373 See Note A in Notes to Financial Statements. 1 The maturity date for an investment contract represents the date when either the entire contract matures or the final portion of the contract matures. 2 The interest rate will change quarterly (but will not fall below zero) based upon the performance of the underlying investment portfolio. The contract has no stated maturity date. The contract can be terminated by either party after providing 60 days notice. 3 The underlying investment portfolio is composed of corporate bonds, asset-backed/commercial mortgage-backed securities, U.S. Treasury securities, and government-agency securities, and is managed by Vanguard Fixed Income Group. Also considered an affiliated company of the trust as the issuer is a member of The Vanguard Group. 4 The underlying investment portfolio is composed of corporate bonds, asset-backed/commercial mortgage-backed securities, U.S. Treasury securities, and government-agency securities, and is managed by New York Life Investment Management LLC. 5 The underlying investment portfolio is composed of corporate bonds, asset-backed/commercial mortgage-backed securities, U.S. Treasury securities, and government-agency securities, and is managed by Prudential Trust Company. 6 Considered an affiliated company of the trust as the issuer is a member of The Vanguard Group. Rate shown is the 7-day yield. See accompanying Notes, which are an integral part of the Financial Statements. 11

14 Retirement Savings Master Trust Statements of Assets and Liabilities December 31, 2016 ($000) Assets Unaffiliated Investments at Fair Value 19,233,776 Affiliated Investments at Fair Value 1,119,916 Total Investments at Fair Value 20,353,692 Wrap Contracts at Fair Value 339 Other Assets 228,287 Total Assets 20,582,318 Liabilities Liabilities 332,273 Net Assets Reflecting All Investments at Fair Value 20,250,045 Adjustment from Fair Value to Contract Value for Fully Benefit-Responsive Investment Contracts (168,672) Net Assets 20,081,373 Applicable to 20,081,373,379 and outstanding units of beneficial interest, respectively (unlimited authorization) Net Asset Value Per Unit (Net Assets Divided by Units Outstanding) $1.00 Change in Adjustment from Fair Value to Contract Value for Fully Benefit-Responsive Investment Contracts Beginning of the Period (304,727) Increase (Decrease) due to Changes in the Fully Benefit-Responsive Investment Contracts 136,055 End of the Period (168,672) 12 See accompanying Notes, which are an integral part of the Financial Statements.

15 Retirement Savings Master Trust Statements of Operations and Changes in Net Assets Year Ended December 31, 2016 ($000) Operations Income Interest 446,267 Dividends 1 3,068 Total Income 449,335 Expenses Wrap Fee 39,116 Investment Management Fee 1,919 Total Expenses Note C 41,035 Net Investment Income 408,300 Distributions to Unitholder Trusts Total Distributions (408,300) Transactions with Unitholder Trusts (at $1.00 per unit) Contributions 9,217,276 Contributions from Reinvestment of Distributions 378,740 Withdrawals (7,547,058) Net Increase (Decrease) in Net Assets 2,048,958 Net Assets Beginning of Period 18,032,415 End of Period 20,081,373 1 All dividend income is from an affiliated company of the trust. See accompanying Notes, which are an integral part of the Financial Statements. 13

16 Retirement Savings Master Trust Financial Highlights For a Unit Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 Investment Activities Net Investment Income Total from Investment Operations Distributions Net Investment Income (.022) (.022) (.021) (.020) (.027) Total Distributions (.022) (.022) (.021) (.020) (.027) Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 Total Return 2.18% 2.21% 2.14% 2.05% 2.69% Ratios/Supplemental Data Net Assets, End of Period (Millions) $20,081 $18,032 $17,066 $17,951 $18,722 Ratio of Total Expenses to Average Net Assets Note C 0.21% 0.22% 0.23% 0.22% 0.20% Ratio of Net Investment Income to Average Net Assets 2.13% 2.17% 2.10% 2.01% 2.64% Average Yield Earned by Trust % 2.29% 2.30% 1.98% 2.22% Average Yield Earned by Trust Paid to Participants % 1.92% 1.89% 1.56% 1.82% 1 The average yield earned by the Trust (which may differ from the interest rate credited to participants in the Trust). This average yield is calculated by dividing the annualized earnings of all investments in the Trust on the last day of the fiscal year (irrespective of the interest rate credited to participants in the Trust) by the fair value of all investments in the Trust. This yield is a requirement under GAAP (see Notes to Financial Statements). 2 The average yield earned by the Trust with an adjustment to reflect the actual interest rate credited to participants in the Trust. This average yield is calculated by dividing the annualized earnings credited to participants on the last day of the fiscal year (irrespective of the actual earnings of the investments in the Trust) by the fair value of all investments in the Trust. This yield is a requirement under GAAP (see Notes to Financial Statements). 14 See accompanying Notes, which are an integral part of the Financial Statements.

17 Retirement Savings Master Trust Notes to Financial Statements VRST Master Trust (the Trust ) is a collective investment trust established on July 1, 2001, under Section 404 of the Pennsylvania Banking Code. The Trust provides for the collective investment of assets of tax-exempt pension and profit-sharing plans, primarily in a pool of investment contracts that are issued by insurance companies and commercial banks and in contracts that are backed by bond funds and trusts that are selected by the Trustee, Vanguard Fiduciary Trust Company. The issuers ability to meet these obligations may be affected by economic developments in their respective companies and industries. A. The following significant accounting policies conform to generally accepted accounting principles (GAAP) for U.S. Investment Companies. The Trust consistently follows such accounting policies when preparing its financial statements. 1. Security Valuation: Investments held by the Trust are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets of the Trust attributable to fully benefit-responsive investment contracts, because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the underlying defined-contribution plans. The accompanying Schedule of Investments reflects both the fair value and the adjustment to contract value for each investment contract deemed fully benefit-responsive. The Statement of Assets and Liabilities presents the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The Statement of Operations and Changes in Net Assets are prepared on a contract value basis. Traditional investment contracts issued by insurance companies and banks are nontransferable, but provide for benefit-responsive withdrawals by plan participants at contract value. For traditional investment contracts, fair value comprises the expected future cash flows for each contract discounted to present value. Contract value represents contributions made plus interest accrued at the contract rate, less withdrawals. The crediting rate on traditional contracts is typically fixed for the life of the investment. Synthetic investment contracts consist of investments together with contracts under which a bank or other institution provides for benefit-responsive withdrawals by plan participants at contract value. For synthetic investment contracts, the fair value comprises the aggregate market values of the underlying investments in mutual funds and bond trusts, and the value of the wrap contracts, if any. The difference between valuation at contract value and fair value is reflected over time through the crediting rate formula provided for in the Trust s synthetic contracts. The crediting rate of the contract resets every quarter based on the performance of the underlying investment portfolio. To the extent that the Trust has unrealized gains and losses (that are accounted for, under contract value accounting, through the value of the synthetic contract), the interest crediting rate may differ from then-current market rates. An investor currently redeeming Trust units may forego a benefit, or avoid a loss, related to a future crediting rate different from then-current market rates. Investments in mutual funds and bond trusts are valued at the net asset value of each fund or trust determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. 2. Federal Income Taxes: The Internal Revenue Service has determined that the Trust qualifies as a group trust arrangement that is exempt from federal income tax under Section 501(a) of the Internal Revenue Code. Accordingly, no provision for federal income taxes is required in the financial statements. 15

18 Retirement Savings Master Trust 3. Income and Distributions: Dividend income represents income from a Vanguard money market fund that is an affiliate of the Trust; such income is accrued daily. Interest income is calculated and accrued daily using the daily deposit balance in the respective investment contract at the crediting rate of the contract. Distributions of net investment income to unitholders are declared daily and reinvested monthly. 4. Limitations on Contract Value Transactions: The existence of certain conditions can limit the Trust s ability to transact at contract value with issuers of its investment contracts. Specifically, any event outside the normal operation of the Trust that causes a withdrawal from an investment contract may result in a negative market value adjustment with respect to the withdrawal. Examples of such events include, but are not limited to, partial or complete legal termination of the Trust or a unitholder, tax disqualification of the Trust or unitholder, and certain Trust amendments if issuers consent is not obtained. As of December 31, 2016, the occurrence of an event outside the normal operation of the Trust that would cause a withdrawal from an investment contract is not considered to be probable. In general, issuers may terminate the contract and settle at other than contract value if there is a change in the qualification status of a participant, employer, or plan; a breach of material obligations under the contract and misrepresentation by the contract holder; or failure of the underlying portfolio to conform to the preestablished investment guidelines. B. Sensitivity Analysis: The following analysis is intended to provide the likely reaction of the Trust s crediting rate to various changes in current yield, both with static and a decrease in net assets. This analysis is required by GAAP and is for illustrative purposes only. It reflects the sensitivity to the rate reset process currently employed for the synthetic investment contracts in the Trust, which represent approximately 92% of the Trust s net assets. The crediting rate on the Trust and total returns actually achieved by investors in the future may vary significantly due to market, plan and cash flow events. Average Interest Crediting Rate % Current market interest rate % Duration Market Value/Book Value Ratio % 16

19 Retirement Savings Master Trust No Change in Net Assets Change in Current Market Interest Rate 50% 25% 0% 25% 50% Market Interest Rate (YTM) 0.98% 1.46% 1.95% 2.44% 2.93% Estimated Initial Portfolio Crediting Rate Reset 2.27% 2.27% 2.26% 2.25% 2.23% Estimated Portfolio Crediting Rate at the End of Period March 31, % 2.20% 2.24% 2.27% 2.29% June 30, % 2.14% 2.21% 2.28% 2.34% September 30, % 2.08% 2.19% 2.29% 2.39% December 31, % 2.03% 2.17% 2.31% 2.43% 10% Decrease in Net Assets Change in Current Market Interest Rate 50% 25% 0% 25% 50% Market Interest Rate (YTM) 0.98% 1.46% 1.95% 2.44% 2.93% Estimated Initial Portfolio Crediting Rate Reset 2.41% 2.36% 2.30% 2.23% 2.15% Estimated Portfolio Crediting Rate at the End of Period March 31, % 2.28% 2.27% 2.25% 2.21% June 30, % 2.21% 2.24% 2.26% 2.27% September 30, % 2.15% 2.22% 2.28% 2.33% December 31, % 2.09% 2.20% 2.29% 2.38% 1 The average interest crediting rate is the blended contract yield of the Trust as of December 31, Current market rate is the weighted average option-adjusted yield-to-maturity (YTM) of the investments underlying the Trust s synthetic contracts. 3 The duration and market value/book value ratios represent those characteristics of the Trust s synthetic contracts as of December 31, C. Units of the Trust are offered only to other eligible Vanguard Fiduciary Trust Company trusts (the Unitholder Trusts ) and to tax-qualified pension plans ( qualified plans ). The Trustee does not charge any fees to the Trust; instead, each Unitholder Trust and qualified plan is charged its own Trustee fee. Withdrawals may be initiated by the Unitholder Trusts or qualified plans for the primary purposes of funding an authorized distribution, withdrawal, or loan disbursement by a participating pension or profit-sharing plan to an employee or beneficiary covered there under, or for the purpose of the participating plan making an employee-directed transfer to another investment election of the employee s interest in the plan. A wrap fee is paid to all issuers of synthetic investment contracts. During the year ended December 31, 2016, the wrap fee represented an annual rate of 0.20% of the Trust s average net assets. Underlying investment portfolios not managed by Vanguard are subject to an investment mangagement fee. During the year ended December 31, 2016, the investment management fee represented an annual rate of 0.01% of the Trust s average net assets. D. During the year ended December 31, 2016, the Trust made purchases of $1,683,000,000 and sales of $357,996,000 of investment securities other than temporary cash investments. Detailed information on security transactions can be obtained from the Trustee upon request. 17

20 Retirement Savings Master Trust E. Various inputs may be used to determine the value of the Trust s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. Level 1 Quoted prices in active markets for identical securities. Level 2 Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Level 3 Significant unobservable inputs (including the Trust s own assumptions used to determine the fair value of investments). The following table summarizes the Trust s investments as of December 31, 2016, based on the inputs used to value them: Level 1 Level 2 Level 3 Investments at Fair Value ($000) ($000) ($000) Traditional Investment Contracts 661,651 Synthetic Investment Contracts 18,572,125 Wrap Contracts 339 Short-Term Investments 1,119,916 Total 1,119,916 19,234,115 F. Management has determined that no material events or transactions occurred subsequent to April 6, 2017, that would require recognition or disclosure in these financial statements. 18

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22 Glossary Average Duration. An estimate of how much a bond s price will fluctuate in response to a change in interest rates. To see how the price could shift, multiply the bond s duration by the change in rates. If interest rates rise by 1 percentage point, the price of a bond with a duration of five years would decline by about 5%. If rates decrease by a percentage point, the bond s price would rise by 5%. The Master Trust s average duration is reported for all bond and cash investments held by the Master Trust. The Master Trust s price will not change due to changing interest rates, because all bond investments are held within contracts. Average Credit Quality. An indicator of credit risk, this figure is the average of the credit ratings assigned to the Master Trust s holdings by credit-rating agencies. Agencies assign credit ratings after appraising an issuer s ability to meet its obligations. Quality is graded on a scale, with Aaa indicating the most creditworthy issuers. Cash Investments. The percentage of the Master Trust s net assets invested in cash equivalents highly liquid, short-term, interest-bearing instruments. Distribution of Investments. An indicator of principal risk. In general, the higher the concentration in alternative contracts, the smaller the Master Trust s average exposure to any single investment s performance and the more likely the Master Trust as a whole will maintain a stable principal value. Gross Spot Yield. The weighted average contract yield as of the report date, gross of stable value management and contract fees. MV/BV Ratio. The ratio of the market value of the bonds and/or bond funds backing synthetic investment contracts relative to the book value of the contracts. Contracts provide for the payment of participant benefits at book value under normal circumstances. When this ratio is less than 100%, the occurrence of an event or condition that is outside the normal operation of the plan (for example, layoffs, plan amendments, sale of a division, or participant withdrawals due to a plan sponsor s insolvency or bankruptcy), if adequate notice has not been provided to Vanguard, could cause participant benefits to be paid at less than book value. Synthetic Investment Contracts. Individually negotiated investments, these contracts are supported by a portfolio of high-quality fixed income assets and mutual funds as well as the financial strength of the issuing financial institution. Returns earned on the contracts vary with the performance of the underlying fixed income assets and mutual funds. These assets back the contract and are owned by the trustee (for example, Vanguard Fiduciary Trust Company) on behalf of the Master Trust. These contracts are also called alternative investment contracts. Traditional Investment Contracts. Individually negotiated investments, the terms of which specify liquidity, yield, interest payments, and maturity (return of principal). These contracts are direct obligations of the issuing companies and are backed only by the financial strength of those companies. 20

23 Vanguard Retirement Savings Master Trust Vanguard Retirement Savings Master Trust is a collective investment fund for tax-qualified pension and profit-sharing plan assets; it is not a mutual fund. The Trust seeks to provide participants with an attractive rate of interest and safety of principal by investing in investment contracts issued by financial institutions and in contracts that are backed by high-quality bonds and bond mutual funds owned by the Trustee on behalf of the Trust. The principal and interest of these contracts are not guaranteed by the federal government or The Vanguard Group. It is Vanguard s expectation that each unit of the Trust will maintain a constant net asset value of $1. However, there is no assurance that this will be the case. The Trustee for the program is Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, Inc., organized and existing under the banking laws of the Commonwealth of Pennsylvania. Investment and administrative services are provided to the Trust by Vanguard Fixed Income Group. Directors of Vanguard Fiduciary Trust Company F. William McNabb III Chairman, President, and Chief Executive Officer Mortimer J. Buckley Senior Vice President Martha G. King Senior Vice President Chris D. McIsaac Senior Vice President Glenn W. Reed Senior Vice President Heidi Stam Senior Vice President and General Counsel

24 P.O. Box 2600 Valley Forge, PA Connect with Vanguard > vanguard.com Participant Services > CFA is a registered trademark owned by CFA Institute. All comparative stable value fund data are from Hueler Analytics Stable Value Pooled Fund Universe, unless otherwise noted The Vanguard Group, Inc. All rights reserved. Q

25 Vanguard Retirement Savings Trust As of December 31, 2016 This section includes a summary of the performance of Vanguard Retirement Savings Trust (VRST) as well as the Trust s financial statements. Contents Performance Summary 1 Statement of Net Assets 2 Statement of Operations and Changes in Net Assets 3 Financial Highlights 4 Notes to Financial Statements 5 Report of Independent Auditors 7 Performance Summary The performance information in the table and chart takes into account all expenses and fees. (Performance figures for the Master Trust, which are presented in the accompanying report, are gross of investment management fees and net of contract fees.) All of the data represent past performance, which cannot be used to predict future returns that may be achieved by the Trust. An investment in the Trust is neither insured nor guaranteed by the U.S. government nor by Vanguard, and there is no assurance that the Trust will be able to maintain a stable net asset value of $1 per unit. Annual Total Returns (%): December 31, 2006 December 31, 2016 Stable Value Retirement Funds Savings Trust 1 Average % 4.57% Average Annualized Returns Final Value Periods Ended December 31, 2016 of a $10,000 One Year Five Years Ten Years Investment 3 Retirement Savings Trust % 1.94% 2.73% $13,089 Stable Value Funds Average ,734 1 Net of investment management fees and fees paid to issuers of synthetic investment contracts. As of December 31, 2016, these fees were 0.31% and 0.20%, respectively. 2 Supplied by Hueler Analytics Stable Value Pooled Universe, net of fees paid to issuers of synthetic investment contracts and estimated investment management fees of 0.31% for the year ended December 31, Growth from January 1, 2007, through December 31,

26 The Value of Investing for the Long Term: December 31, 2006 December 31, 2016 This chart presents the growth of a hypothetical $10,000 investment made in the Retirement Savings Trust ten years ago. $16,000 13, ,000 Financial Statements These statements should be read in conjunction with the financial statements of VRST Master Trust, which appear in the accompanying report. Statement of Net Assets As of December 31, 2016 This Statement shows the Trust s investment in the VRST Master Trust. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the Trust s Net Assets. Fair Value Units ($000) Investments (100%) VRST Master Trust 3,601,984,262 3,601,984 Total Investments 3,601,984 Other Assets and Liabilities Other Assets 47,056 Liabilities (47,056) Net Assets (100%) Applicable to 3,601,984,262 outstanding units of beneficial interest (unlimited authorization) 3,601,984 Net Asset Value Per Unit $ See Note A in Notes to Financial Statements. See accompanying Notes, which are an integral part of the Financial Statements.

27 Statements of Operations and Changes in Net Assets Year Ended December 31, 2016 ($000) Operations Income Income Distributions Received from VRST Master Trust 82,091 Expense Trustee Fee Note C 10,767 Net Investment Income 71,324 Distributions to Trust Participants Net Investment Income (71,324) Transactions with Trust Participants (at $1.00 per unit) Contributions 1,220,041 Contributions from Reinvestment of Distributions 71,324 Withdrawals (1,682,189) Net Increase (Decrease) in Net Assets (390,824) Net Assets Beginning of Period 3,992,808 End of Period 3,601,984 See accompanying Notes, which are an integral part of the Financial Statements. 3

28 Financial Highlights For a Unit Outstanding Year Ended December 31, Throughout Each Period Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 Investment Activities Net Investment Income Total from Investment Operations Distributions Net Investment Income (.019) (.019) (.018) (.017) (.023) Total Distributions (.019) (.019) (.018) (.017) (.023) Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 Total Return 1.87% 1.90% 1.82% 1.73% 2.37% Ratios/Supplemental Data Net Assets, End of Period (Millions) $3,602 $3,993 $4,554 $6,146 $8,538 Ratio of Total Expenses to Average Net Assets Note C 0.28% 0.29% 0.30% 0.30% 0.30% Ratio of Net Investment Income to Average Net Assets 1.85% 1.88% 1.81% 1.71% 2.34% 4 See accompanying Notes, which are an integral part of the Financial Statements.

29 Notes to Financial Statements Vanguard Retirement Savings Trust (the Trust ) is a collective investment trust established on January 1, 1989, under Section 404 of the Pennsylvania Banking Code. Vanguard Fiduciary Trust Company serves as Trustee to the Trust. The Trust provides for the collective investment of assets of tax-exempt pension and profit-sharing plans. The Trust invests solely in VRST Master Trust. The underlying investments of VRST Master Trust are primarily in a pool of investment contracts that are issued by insurance companies and commercial banks and in contracts that are backed by bond funds and trusts. The issuers ability to meet these obligations may be affected by economic developments in their respective companies and industries. A. The following significant accounting policies conform to generally accepted accounting principles (GAAP) for U.S. Investment Companies. The Trust consistently follows such accounting policies when preparing its financial statements. 1. Security Valuation: The Trust s investment in VRST Master Trust is valued at the unit value of VRST Master Trust. 2. Federal Income Taxes: The Internal Revenue Service has determined that the Trust qualifies as a group trust arrangement that is exempt from federal income tax under Section 501(a) of the Internal Revenue Code. Accordingly, no provision for federal income taxes is required in the financial statements. 3. Distributions: Distributions of net investment income to unitholders are declared daily and reinvested on the first business day of the following month. 4. Income: Distributions received from the VRST Master Trust are accrued daily. B. Withdrawals may be made for the primary purposes of funding an authorized distribution, withdrawal, or loan disbursement by a participating pension or profit-sharing plan to an employee or beneficiary covered thereunder, or for the purpose of the participating plan making an employeedirected transfer to another investment election of the employee s interest in the plan. Certain plan-directed withdrawals may be subject to market value adjustments calculated in accordance with the provisions of the investment contracts. C. The Trust pays the Trustee a fee calculated at an annual percentage rate of the Trust s proportionate share of the total investments of VRST Master Trust. During the year ended December 31, 2016, the rate charged to the Trust was 0.28%. Assets subject to the Trustee fee are reduced by the Trust s proportionate share of VRST Master Trust s investments in Vanguard mutual funds. The fee is determined by the Trustee and may be adjusted periodically. Direct expenses of the Trust are paid by the Trustee in accordance with the Trust agreement. D. During the year ended December 31, 2016, the Trust made purchases of $1,291,365,000 and sales of $1,682,189,000 of units of VRST Master Trust. Detailed information on security transactions can be obtained from the Trustee on request. 5

30 E. Various inputs may be used to determine the value of the Trust s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. Level 1 Quoted prices in active markets for identical securities. Level 2 Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Level 3 Significant unobservable inputs (including the Trust s own assumptions used to determine the fair value of investments). At December 31, 2016, the Trust s sole investment was in VRST Master Trust, which was valued based on Level 2 inputs. F. Management has determined that no material events or transactions occurred subsequent to April 6, 2017, that would require recognition or disclosure in these financial statements. 6

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32 2017 The Vanguard Group, Inc. All rights reserved. F