Vanguard Retirement Savings Master Trust

Transcription

1 Annual Report December 31, 2017 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 2017 Total Returns 1 Chairman s Letter 2 Advisor s Report 4 Portfolio Profile 5 Performance Summary 6 Financial Statements 8 Glossary 18 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: Nautical images have been part of Vanguard s rich heritage since its start in For an incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put you first and light the way as you strive to meet your financial goals. Our client focus and low costs, stemming from our unique ownership structure, assure that your interests are paramount.

3 2017 Total Returns 1 Periods Ended December 31, 2017 One Year Three Years Five Years Vanguard Retirement Savings Master Trust 2.07% 2.16% 2.13% 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, Solid economic data and a strong labor market prompted the Federal Reserve to raise the federal funds rate three times in Short-term rates rose, while longer-term rates eased lower as investors felt less optimistic about longer-range prospects for faster economic growth and higher inflation. Bill McNabb Chairman This flattening of the yield curve resulted in long-term bonds significantly outperforming their intermediate- and short-term counterparts. The broad taxable bond market, which represents the investments supporting the Retirement Savings Master Trust s contracts, turned in positive returns each quarter of 2017 and returned 3.54% for the year, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index. The performance of the Trust s supporting assets conservative, high-credit-quality bonds (as defined by nationally recognized rating agencies) is reflected in the Trust s market value/book value (MV/BV) ratio. This ratio fluctuated modestly during the year, and declined from % as of year-end 2016 to % as of December 31,

5 The total return of the Trust, determined by its investments average performance over time, remained ahead of the stable value funds average as reported by Hueler Analytics. 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 March 30, 2018 Market Barometer Average Annual Total Returns Periods Ended December 31, 2017 One Year Three Years Five Years Stocks Russell 1000 Index (Large-caps) 21.69% 11.23% 15.71% 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) 3.54% 2.24% 2.10% Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) Citigroup Three-Month U.S. Treasury Bill Index CPI Consumer Price Index 2.11% 1.64% 1.43% 3

6 Advisor s Report Vanguard Retirement Savings Master Trust performed well against the average stable value fund. 1 It returned 2.07% for the year ended December 31, 2017, and 2.16% on an average annualized basis over the past three years. During the year, interest rates were pushed higher at the shorter end of the yield curve, reflecting Federal Reserve rate increases. But rates were anchored at the longer end amid subdued economic growth and inflation that remained below the Fed s target range. The 2-year U.S. Treasury note yield was 1.19% as of December 31, 2016, increasing steadily through the year to 1.49% as of September 30, 2017, and 1.89% as of December 31. The 5-year Treasury note yield was 1.93% as of year-end 2016, 1.94% as of September 30, and 2.21% as of December 31. The assets supporting the Trust s contracts are diversified among U.S. Treasury securities, high-quality mortgagebacked securities, corporate bonds, and asset-backed securities. The Trust s market value/book value (MV/BV) ratio, which reflects the returns of these assets, was relatively constant during the year, from % as of December 31, 2016, to % as of September 30, ending the year at %. The average gross yield of the Trust, influenced by current interest rates as well as the MV/BV ratio, was 2.29% as of December 31, 2016, declined to 2.18% as of March 31, and ended 2017 at 2.36%. During the fourth quarter, following Bank of Tokyo-Mitsubishi s notification to the market of its intent to exit the stable value business, the Trust s assets were redeployed among existing issuers and an issuer new to the Trust, Nationwide Life. In addition, the assets underlying the Prudential wrap were consolidated. The assets were transferred to Vanguardmanaged funds to reduce costs. Looking ahead This year, Susan Graef will retire and Patricia Selim, CFA, a ten-year Vanguard veteran, will assume the leadership of an experienced and deep stable value team. We continue to work to position the assets supporting the Trust s contracts to provide protection from major market risk. Through changes in the fixed income 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, Head of Stable Value Mark D. Dorfler, Portfolio Manager Paul M. Jakubowski, Principal Vanguard Fiduciary Trust Company March 30, Source: Hueler Analytics Stable Value Pooled Fund Universe. 4

7 Retirement Savings Master Trust Portfolio Profile As of December 31, 2017 Financial Attributes Number of Contract Issuers 9 Gross Spot Yield 2.36% Average Duration 3.14 MV/BV Ratio % Average Quality Aa1 Investments (in millions) $19,067 Distribution of Investments 1 Synthetic Investment Contracts Constant Duration Contracts % Finite-Term Contracts 0.0 Traditional Investment Contracts 3.5 Cash Investments 3.3 Total 100.0% Distribution by Duration Under 1 Year 15.3% 1 to 3 Years to 5 Years to 10 Years 27.4 Over 10 Years 0.6 Total 100.0% Distribution by Credit Quality 3 Synthetic Underlying Asset Exposure Vanguard Institutional Intermediate-Term Bond Fund 53.9% Vanguard Institutional Short-Term Bond Fund 25.6 Met Life Intermediate Separate Account 5.0 New York Life Collective Investment Trust 4.4 Met Life Short Separate Account 4.2 Total 93.1% Sector Diversification of Underlying Asset Exposure 4 Corporate 21.1% Treasury 18.8 Pass-Through MBS 18.7 Asset-Backed 17.2 Foreign 8.3 Agency 5.5 Cash Equivalent 4.3 CMBS 2.6 Traditional Contracts 3.5 Total 100.0% Investment Focus Average Maturity Credit Quality High Short Med. Long Government 43.0% Aaa 23.0 Medium Aa1 3.9 Aa2 3.5 Low Aa3 7.5 A1 4.1 A2 6.1 A3 8.9 Total 100.0% 1 Based on total fund book value. All other sections based on total fund market value. 2 Contracts for which there is no set maturity date; each can be terminated after providing 60 days notice. 3 Credit-quality ratings for each issue are obtained from Moody s Investors Service (Moody s), Fitch Ratings (Fitch), and Standard & Poor s (S&P). When ratings of all three agencies are available, the median rating is used. When ratings are available from two agencies, the lower rating is used. When one rating is available, that rating is used. Percentages based on total market value. 4 Based on total fund market value. See the Glossary for definitions of investment terms used in this report. 5

8 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, 2007 December 31, 2017 VRST Stable Value Master Funds Trust 1 Average % 4.58% Average Annualized Returns Final Value Periods Ended December 31, 2017 of a $10,000 One Year Five Years Ten Years Investment 3 VRST Master Trust % 2.13% 2.77% $13,139 Stable Value Funds Average ,775 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, 2008, 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. 6

9 Retirement Savings Master Trust The Value of Investing for the Long Term: December 31, 2007 December 31, 2017 This chart presents the growth of a hypothetical $10,000 investment made in the Master Trust ten years ago. $15,000 13, ,000 7

10 Retirement Savings Master Trust Financial Statements Schedule of Investments As of December 31, 2017 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 (96.6%) Traditional Contracts Issued by Insurance Companies and Banks (3.6%) Metropolitan Life Insurance Co. AA-/Aa % 7/6/18 122,265 (268) 121,997 Metropolitan Life Insurance Co. AA-/Aa % 7/6/18 5,991 (13) 5,978 Metropolitan Life Insurance Co. AA-/Aa % 12/14/18 50,328 (277) 50,051 Metropolitan Life Insurance Co. AA-/Aa % 9/27/19 102,679 (271) 102,408 Metropolitan Life Insurance Co. AA-/Aa % 4/17/20 23,528 (180) 23,348 Metropolitan Life Insurance Co. AA-/Aa % 8/17/20 101,704 (890) 100,814 New York Life Insurance Co. AA+/Aaa 1.690% 12/17/18 40,026 (30) 39,996 New York Life Insurance Co. AA+/Aaa 2.250% 11/16/20 107,824 (883) 106,941 New York Life Insurance Co. AA+/Aaa 2.050% 10/12/21 128,727 (624) 128,103 Total Traditional Contracts Issued by Insurance Companies and Banks 683,072 (3,436) 679,636 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 (93.0%) American General Life Insurance Co. (8.3%) A+/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,035,119 (216) 1,034,903 Vanguard Institutional Short-Term Bond Fund 3 542,765 (114) 542,651 JPMorgan Chase Bank (12.1%) A+/Aa % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,487,944 (11,156) 1,476,788 Vanguard Institutional Short-Term Bond Fund 3 837,101 (6,276) 830,825 Metropolitan Life Insurance Co. (9.3%) AA-/Aa % 2 The Metropolitan Life Separate Account Trust 4 807,193 (162) ,983 The Metropolitan Life Short Separate Account Trust 4 962,695 (193) 1, ,637 8

11 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) Nationwide Life (6.8%) A+/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 838,358 (2,865) 835,493 Vanguard Institutional Short-Term Bond Fund 3 471,214 (1,611) 469,603 New York Life Insurance Co. (4.4%) AA+/Aaa 2.550% 2 The New York Life Trust Company Vanguard Synthetic GIC Collective Investment Trust 5 850,368 (2,174) 848,194 Prudential (14.7%) AA-/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 2,256,331 (19,644) 2,236,687 Vanguard Institutional Short-Term Bond Fund 3 567,593 (4,941) 562,652 State Street Bank & Trust (14.1%) AA-/Aa % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,951,878 (11,638) 1,940,240 Vanguard Institutional Short-Term Bond Fund 3 763,731 (4,554) 759,177 Transamerica Premier Life (14.4%) AA-/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,587,531 (3,753) 1,583,778 Vanguard Institutional Short-Term Bond Fund 3 1,167,517 (2,760) 1,164,757 United of Omaha (8.9%) AA-/A % 2 Vanguard Institutional Intermediate-Term Bond Fund 3 1,162,253 (5,732) 1,156,521 Vanguard Institutional Short-Term Bond Fund 3 545,962 (2,693) 543,269 Total Synthetic Investment Contracts 17,835,553 (355) (78,040) 17,757,158 Total Investment Contracts 18,518,625 (355) (81,476) 18,436,794 9

12 Retirement Savings Master Trust Short-Term Investments (3.2%) 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) Vanguard Federal Money Market Fund Investor Shares 6 AA/Aa % 630, ,111 Total Investments (99.8%) 19,148,736 (355) (81,476) 19,066,905 Other Assets and Liabilities Net (0.2%) 15,577 Net Assets (100%) 19,082,482 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, 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, government-agency securities, and is managed by Vanguard Fixed Income Group. 5 The underlying investment portfolio is composed of corporate bonds, asset-backed/commercial mortgage-backed securities, U.S. Treasury securities, government-agency securities, and is managed by New York Life Investment Management LLC. 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. 10

13 Retirement Savings Master Trust Statement of Assets and Liabilities December 31, 2017 ($000) Assets Investments at Fair Value 19,148,736 Wrap Contracts at Fair Value (355) Other Assets 109,691 Total Assets 19,258,072 Liabilities Liabilities 94,114 Net Assets Reflecting All Investments at Fair Value 19,163,958 Adjustment from Fair Value to Contract Value for Fully Benefit-Responsive Investment Contracts (81,476) Net Assets 19,082,482 Applicable to 19,082,481,671 outstanding units of beneficial interest, respectively (unlimited authorization) Net Asset Value Per Unit (Net Assets Divided by Units Outstanding) $1.00 Change in the Adjustment from Fair Value to Contract Value for Fully Benefit-Responsive Investment Contracts Beginning of the Period (168,672) Increase (Decrease) due to Changes in the Fully Benefit-Responsive Investment Contracts 87,196 End of the Period (81,476) See accompanying Notes, which are an integral part of the Financial Statements. 11

14 Retirement Savings Master Trust Statement of Operations and Changes in Net Assets Year Ended December 31, 2017 ($000) Operations Income Interest 431,502 Dividends 1 6,725 Total Income 438,227 Expenses Wrap Fee 38,847 Investment Management Fee 1,614 Total Expenses Note C 40,461 Net Investment Income 397,766 Distributions to Unitholder Trusts Total Distributions (397,766) Transactions with Unitholder Trusts (at $1.00 per unit) Contributions 6,964,465 Contributions from Reinvestment of Distributions 369,041 Withdrawals (8,332,397) Net Increase (Decrease) in Net Assets (998,891) Net Assets Beginning of Period 20,081,373 End of Period 19,082,482 1 All dividend income is from an affiliated company of the Trust. See accompanying Notes, which are an integral part of the Financial Statements. 12

15 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 (.021) (.022) (.022) (.021) (.020) Total Distributions (.021) (.022) (.022) (.021) (.020) Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 Total Return 2.07% 2.18% 2.21% 2.14% 2.05% Ratios/Supplemental Data Net Assets, End of Period (Millions) $19,082 $20,081 $18,032 $17,066 $17,951 Ratio of Total Expenses to Average Net Assets Note C 0.21% 0.21% 0.22% 0.23% 0.22% Ratio of Net Investment Income to Average Net Assets 2.03% 2.13% 2.17% 2.10% 2.01% Average Yield Earned by Trust % 2.22% 2.29% 2.30% 1.98% Average Yield Earned by Trust Paid to Participants % 1.87% 1.92% 1.89% 1.56% 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). See accompanying Notes, which are an integral part of the Financial Statements. 13

16 Retirement Savings Master Trust Notes to Financial Statements Vanguard Retirement Savings 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 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. 14

17 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, 2017, 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 93% 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 % 15

18 Retirement Savings Master Trust No Change in Net Assets Change in Current Market Interest Rate 50% 25% 0% 25% 50% Market Interest Rate (YTM) 1.21% 1.82% 2.42% 3.03% 3.63% Estimated Initial Portfolio Crediting Rate Reset 2.55% 2.56% 2.56% 2.53% 2.49% Estimated Portfolio Crediting Rate at the End of Period March 31, % 2.51% 2.55% 2.57% 2.58% June 30, % 2.45% 2.54% 2.61% 2.66% September 30, % 2.41% 2.53% 2.64% 2.73% December 31, % 2.36% 2.52% 2.67% 2.80% 10% Decrease in Net Assets Change in Current Market Interest Rate 50% 25% 0% 25% 50% Market Interest Rate (YTM) 1.21% 1.82% 2.42% 3.03% 3.63% Estimated Initial Portfolio Crediting Rate Reset 2.70% 2.65% 2.57% 2.48% 2.37% Estimated Portfolio Crediting Rate at the End of Period March 31, % 2.58% 2.56% 2.52% 2.46% June 30, % 2.52% 2.55% 2.56% 2.55% September 30, % 2.47% 2.54% 2.59% 2.63% December 31, % 2.42% 2.53% 2.63% 2.71% 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, 2017, 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 management fee. During the year ended December 31, 2017, 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, 2017, the Trust made purchases of $3,612,235,000 and sales of $4,200,461,000 of investment securities other than temporary cash investments. Detailed information on security transactions can be obtained from the Trustee upon request. 16

19 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, 2017, based on the inputs used to value them: Level 1 Level 2 Level 3 Investments at Fair Value ($000) ($000) ($000) Traditional Investment Contracts 683,072 Synthetic Investment Contracts 17,835,553 Wrap Contracts (355) Short-Term Investments 630,111 Total 630,111 18,518,270 F. Management has determined that no material events or transactions occurred subsequent to April 11, 2018, that would require recognition or disclosure in these financial statements. 17

20 Report of Independent Auditors 18

21 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. 19

22 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 Thomas M. Rampulla Senior Vice President Karin A. Risi Senior Vice President Anne Robinson Senior Vice President and General Counsel Michael Rollings Senior Vice President

23 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

24 VANGUARD RETIREMENT SAVINGS TRUST III FINANCIAL STATEMENTS December 31, 2017 These statements should be read in conjunction with the financial statements of Vanguard Retirement Savings Master Trust (VRST Master Trust), which appear in the accompanying report. Statement of Net Assets Fair Value* Vanguard Retirement Savings Trust III Units ($000) INVESTMENTS (100%) VRST Master Trust 9,712,720,032 9,712,720 TOTAL INVESTMENTS 9,712,720 OTHER ASSETS AND LIABILITIES Other Assets 170,537 Liabilities (170,537) - NET ASSETS (100%) Applicable to 9,712,720,032 outstanding units of beneficial interest (unlimited authorization) 9,712,720 NET ASSET VALUE PER UNIT $1.00 *See Note A in Notes to Financial Statements. See accompanying Notes, which are an integral part of the Financial Statements.

25 Statement of Operations and Changes in Net Assets Vanguard Retirement Savings Trust III Year Ended December 31, 2017 ($000) Operations Income Income Distributions Received from VRST Master Trust 193,119 Expense Trustee Fee - Note C 12,431 Net Investment Income 180,688 Distributions to Trust Participants Net Investment Income (180,688) Transactions with Trust Participants (at $1.00 per unit) Contributions 4,316,224 Contributions from Reinvestment of Distributions 180,688 Withdrawals (3,671,925) Net Increase (Decrease) in Net Assets 824,987 Net Assets Beginning of Period 8,887,733 End of Period 9,712,720 See accompanying Notes, which are an integral part of the Financial Statements.

26 Financial Highlights Vanguard Retirement Savings Trust III 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) (.020) (.020) (.020) (.019) Total Distributions (.019) (.020) (.020) (.020) (.019) Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 Total Return 1.91% 2.02% 2.05% 1.98% 1.88% Ratios/Supplemental Data Net Assets, End of Period (Millions) $9,713 $8,888 $7,140 $6,215 $4,025 Ratio of Total Expenses to Average Net Assets - Note C 0.13% 0.13% 0.14% 0.14% 0.14% Ratio of Net Investment Income to Average Net Assets 1.90% 2.00% 2.03% 1.97% 1.87% See accompanying Notes, which are an integral part of the Financial Statements.

27 Vanguard Retirement Savings Trust III Notes to Financial Statements Vanguard Retirement Savings Trust III (the Trust ) is a collective investment trust established on September 5, 2001, 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 Vanguard Retirement Savings Master Trust (VRST Master Trust). The accompanying financial statements of the Master Trust, including the Schedule of Investments, should be read in conjunction with the financial statements of the 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 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 plandirected 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, 2017, the rate charged to the Trust was 0.13%. 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, 2017, the Trust made purchases of $4,496,912,000 and sales of $3,671,925,000 of units of VRST Master Trust. Detailed information on security transactions can be obtained from the Trustee on request. 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, 2017, 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 through April 11, 2018, that would require recognition or disclosure in these financial statements.

28 Report of Independent Auditors To the Board of Directors of Vanguard Fiduciary Trust Company We have audited the accompanying financial statements of Vanguard Fiduciary Trust Company Retirement Savings Trust III (the Trust ), which comprise the statement of net assets as of December 31, 2017, the related statement of operations and changes in net assets for the year then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are hereafter collectively referred to as "financial statements." Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Trust s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vanguard Fiduciary Trust Company Retirement Savings Trust III as of December 31, 2017, the results of its operations and changes in its net assets for the year then ended and the financial highlights for each of the five years in the period then ended, in accordance with accounting principles generally accepted in the United States of America. April 11, 2018 PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,