Selecting and monitoring target-date funds Hello, I m Scott Conking, and you re watching a recent video webcast on the DOL s targetdate fund tips for plan fiduciaries. We hope you enjoy it. Scott Conking: I m Scott Conking, head of Vanguard Institutional Client Services. Targetdate funds have earned a central place in the investment lineups of most plan sponsors, and rightfully so, given their broad diversification and asset allocations that grow more conservative over time. Given the importance of target-date funds in investment lineups, it s vital to follow a disciplined approach in selecting and monitoring them, just as you would with other investment options in your plan. This past February, the Department of Labor published some general guidance to help plan fiduciaries do just that. That s why we re pleased to host this live discussion featuring two of my Vanguard colleagues, John Schadl and Matt Brancato. John leads Vanguard Strategic Retirement Consulting, while Matt is the Target Retirement Fund product manager in Vanguard Portfolio Review Department. Today they ll offer their insights on target-date funds and the recent guidance I mentioned from the DOL. John and Matt, thank you for being here today. Meet the speakers John Schadl Principal and Head of Vanguard Strategic Retirement Consulting John Schadl: Thank you, Scott. Matt Brancato: Thanks, Scott. Scott Conking: Before we actually get to the document itself, it might be helpful to talk about plan sponsors fiduciary responsibility regarding target-date funds. John, do you want to give us a little primer background on it? John Schadl: Sure, Scott. I think it absolutely makes sense for us to level-set. So when a plan sponsor of a defined contribution plan that s subject to ERISA decides to have targetdate funds within their plan lineup, that decision is a fiduciary act or a fiduciary decision that s subject to all of ERISA s fiduciary duties, all the same fiduciary duties we always talk about. So the plan sponsor has to act skillfully, carefully, prudently, diligently, and the decision has to be consistent with the best interests of the plan participants. So all of those core principles that we always apply to all fiduciary decisions apply here when the plan sponsor s making decisions about target-date funds. With these investments, as with any investment, like you mentioned, they have to follow a prudent process. They have to select the fund prudently. They need to make sure they consider all the relevant information. They need to make sure they have a monitoring process and be agile and make changes if they need to, and then make sure they are documenting. And we ll talk about all those steps as we go through today. Scott Conking: So, Matt, I want to turn to you. There s a lot of attention around target-date funds. You read a lot. Why is there so much attention? Matt Brancato Vanguard Target Retirement Fund Product Manager Vanguard Portfolio Review Department Scott Conking Webcast Moderator Principal and Head Vanguard Institutional Client Services
Matt Brancato: Well, Scott, I really trace it back to the needs of the participant. The fact is most people just don t have the time, inclination, or expertise to construct and then monitor their own portfolio, and so target-date funds end up making a lot of sense. And plan sponsors are realizing this and have adopted target-date funds in large numbers. How America Saves was released last week, and we saw that 84% of plan sponsors actually incorporate targetdate funds into their plan lineup today. So given the increased importance within plan lineups, plan sponsors are monitoring target-date funds a lot more, and they rightfully want a deeper understanding of the product. The great news is that at a macro level, target-date funds are doing exactly what you would anticipate. So when you look from 2006 to 2012, extreme allocations where folks either owned zero or 100% equities have dropped from 32% to 16%. John Schadl: We shouldn t forget the important effect the Pension Protection Act of 2006 had on the adoption of target-date funds by plan sponsors. So we all know the Pension Protection Act created for plan sponsors several safe harbors that really tried to drive plan sponsor behavior and fiduciary acts for plan sponsors around plan design. So we got fiduciary relief for automatic enrollment plans and automatic increase plans, and its concept of the qualified default investment alternative was introduced and then subsequent to that, the Department of Labor issued regulations and those regulations said target-date funds can be a qualified default investment alternative. So PPA really accelerated the adoption of target-date funds for plan sponsors, even though target-date funds had existed long before we had PPA. And we know that from plan sponsors that we work with, that when they combine automatic enrollment with automatic increase and then the qualified default as a target-date fund, that that really broadens the population of participants that have an opportunity to save adequately and increases their chances of reaching their retirement goals. Scott Conking: That s important background. So with that, let s delve into the DOL document itself, and it s titled Target Date Retirement Funds: Tips for ERISA Plan Fiduciaries, and there are seven, but John, are these actual regulations? John Schadl: No, they re not actual regulations, and this is a really important point, so let s make the distinction. What is a regulation? Well, a regulation is official guidance that gets issued by an agency. In our case when we re talking about fiduciary topics, it s the Department of Labor. And the way the process ordinarily works is the Department of Labor will issue a proposal and then they ll have a period, a comment period, where the general public, plan participants, sponsors, and folks in the industry can all comment on what the proposal is, and then, before the rule gets finalized, the Department of Labor takes into consideration all of those comments that they ve received. Now with the tips document, there was no proposal and comment period. The DOL issued the tips document as a final piece of guidance. There was no proposal, no opportunity for plan sponsors or service providers to vet what those tips were. And so if it s not a regulation, what is it? Well, it s a document that the DOL put together. It s guidance that was intended to help plan sponsors as they make decisions, and they put it out in response to plan sponsor inquiries as they said, Hey, we re seeing target-date funds become more prevalent, we re thinking about them, or we have them in our plan. Hey, DOL, can you give us some guidance on how to think about these within our plans? So the DOL published this guidance. So, if it s not a regulation, does that mean we should pay attention to it? And I think the answer is absolutely yes. It is clearly the Department of Labor s current best thinking on the way that they think plan sponsors should think about target-date funds and as such, it s highly persuasive.
The truth of the matter is, by and large, the contents of the tips document is not all that controversial, with the one exception that we ll talk about a little later around custom. Most of the tips that the DOL lays out are consistent with the fiduciary duties I talked about earlier and really align very well with the fiduciary best practices that my team, Strategic Retirement Consulting at Vanguard, have been talking to sponsors about over the years. Scott Conking: So let s start going through some of the specific tips that there are. Can you go through the steps the DOL recommends when choosing a target-date fund? John Schadl: Sure, so the first step is really the same first step you would expect a plan sponsor to take with respect to any investment that they have, and you have to follow a prudent process for the selection of the investment. So what does that mean? If you re thinking about putting any investment within your plan, you really need to consider all of the relevant information for that investment and how it relates to your plan so simple standard things that you would think you can get out of the prospectus, for instance, the performance of the investment, the fees and expenses that you would see for that investment. Beyond that, the DOL also says, Hey, think about how that target-date fund is going to be used in your plan, right? Are you going to be using it as a QDIA? Is it something that you are going to be defaulting your participants into, and so will the target-date fund align with your strategy with respect to those participants? Then some additional things that you should think about like, does the target-date fund, or whatever fund you are choosing, does it align with how you think about your participants and when you would expect them to retire? Are there dates in the future for the fund that align with those retirement dates? Scott Conking: So, Matt, you know I am going to ask this question: How do Vanguard s Target Retirement Funds stack up from this perspective? Matt Brancato: Scott, our funds actually have several features that make them particularly attractive as qualified default investment alternatives. First of all, they re low-cost, so the funds are between 16 and 18 basis points and the trusts offer an even greater value to plan sponsors. Second of all, they re fully comprised of market-cap-weighted indexes. They do not incorporate any tactical asset allocation. So that really removes two layers of risk that plan sponsors would otherwise need to monitor. Scott Conking: Okay, great. Now John, let s talk about the next tip in the DOL document. Can you get into more detail there? John Schadl: The next step is around monitoring, and so these two often go together; the prudent selection and monitoring process, and so plan sponsors should have a process where they are reviewing, as with all of their investments, the target-date funds and how those funds are performing and whether or not anything has changed with respect to those target-date funds. Have the fees and expenses changed? Has the investment strategy, the glide path, or the asset allocation changed? Has the investment management team that is running the target-date fund changed? You need to make sure you have a process where you can periodically review the target-date funds again, along with all of your other investments and to the extent you feel there is a need for a change, make the change.
You also probably want to think about whether or not your own strategy with respect to the target-date funds has changed, and so perhaps you ve had target-date funds in your plan, but it wasn t an automatic enrollment plan, or it wasn t a qualified default within the plan. It was just an option for the participants to choose. Maybe now you re going to change and make it a qualified default and you re going to be defaulting people into that investment. Have you changed your strategy and does the target-date fund that you chose align with what your strategy has always been? Scott Conking: Okay, so the key is to have a periodic review process. John Schadl: Absolutely. Scott Conking: Okay. Matt, let s turn to you. Can you cover the next tip on understanding the fund s investments? Matt Brancato: Sure, absolutely. So here, the DOL says that you should understand the glide path and how it changes over time. So Vanguard s approach is to incorporate a through philosophy. Other providers out in the space will apply a to philosophy and really the distinction is that the through approach lands at its most conservative allocation after retirement, whereas a to approach lands at its most conservative allocation at retirement. We base our through construction on the observation that 96% of plan assets are actually retained for use in retirement. We do often get the question of whether a plan sponsor should use a to approach if their plan population withdraws money at a different point than that age 65 mark, and the answer is it really depends. It depends on what the plan participants do. We ve observed that most plan participants expect to have that money through retirement and expect some growth out of it, and so we incorporate that through approach. Scott Conking: The next tip covered in the document, naturally, is something we talk about a lot fees. John, can you talk about what plan sponsors should be concerned about here? John Schadl: Well, if not concerned, at least considering, right? I mean, plan sponsors know that fees matter and the Department of Labor has made fees a point of interest or something that plan sponsors really need to hone their attention onto. And as we have seen with the plan sponsor fee disclosure rules and then the participant fee disclosure rules that went with them, fees matter. And we know that a small difference in fees can have a substantial impact on account balances over a long period of time, and so DOL says here, one of the things that you need to make sure you are thinking about is fees. And again, as we know from our prior conversations about fees, it s not always that the lowest fee is where you need to go, but you need to make sure that whatever the fees that are being paid in conjunction with the target-date fund are reasonable in light of all your facts and circumstances for your plan. Matt Brancato: Yeah, Vanguard s actually said for a long time that costs matter quite a bit and they obviously matter here quite a bit as well, right? So within the target-date funds, when we think about our construction, we actually consciously try to construct it in an efficient way. So when you look at our funds, they re comprised of five index funds, and then within those index funds you have exposure to sectors, geographies, subsectors across the board so highly diversified, but also highly efficient. When you look across the space, other providers construct their funds with narrower slivers of the market, which makes active management and tactical asset allocation a little bit easier. But in doing so, it can also raise the cost of the funds.
Scott Conking: The next tip generated a lot of discussion, and that s around custom targetdate funds. We re going to delve into that a little bit more right now. John, I want to ask you the question: What does the tips sheet say about custom target-date funds? John Schadl: So this was the one portion of the tips document that was maybe a little bit of a surprise. Prior to the issuance of this tips document, DOL had never really taken a public position about custom or nonproprietary funds. And so when it came out in its final form without anybody having an opportunity to vet or comment on it, the industry I think was a little bit surprised. And some have interpreted this provision as being an express DOL endorsement of, for instance, custom target-date funds or perhaps as even a mandate that plan sponsors have to have a custom lineup of target-date funds within their plan. And that s absolutely an over-reading of what the document says. What the document says is that plan sponsors should consider whether or not a custom alternative or a nonproprietary alternative is something that makes sense for their plan and whether or not it s a better fit than whatever the service provider s off-the-shelf product is. And in many respects this makes sense. We talked earlier about you have to have a process where you re thinking about all the relevant facts and circumstances, and so you should think about all the things you can think about, including are there other alternatives that make sense? Now, DOL acknowledges in the tips document that custom doesn t make sense for a lot of plan sponsors because using a custom fund is likely to increase your administrative complexity and it s going to drive up the costs in your plan. And that administrative complexity and the increased cost is going to outweigh whatever perceived benefits the plan sponsor might get out of customization. But Vanguard definitely has a view on customization, don t we, Matt? Matt Brancato: Absolutely, yeah, so when we look at the custom debate, there are some circumstances where custom can make a lot of sense, but they generally sort of center on a couple very particular circumstances. So the gist of the DOL tips is that plan sponsors should consider all their options. We would absolutely agree with that. The four reasons that plan sponsors generally pursue custom are really cost, active manager diversification, control, and then unique circumstances they might want to take into account. So really the first two pieces are a lot more of a critique of the industry than Vanguard in particular. As I mentioned before, we have some of the lowest costs in this space. We do incorporate a fully indexed approach, which reduces the need to diversify among managers. For plan sponsors who do want greater control over their glide path, we ll absolutely work with their service providers. As John mentioned, though, we would just emphasize that there are additional oversight and fiduciary responsibilities that come along with constructing your own glide path.
Scott Conking: So Matt, following up on that, regarding the glide path, from Vanguard s perspective, what should inform plan sponsor s thinking around a glide path? Matt Brancato: We construct our glide path keeping in mind that it s often used as a qualified default investment alternative. So for us, making a transparent, straightforward glide path makes a lot of sense. Many people try to look at glide path construction as an optimization exercise, and we would sort of critique this and say that the best way to actually optimize is to look to the individual and incorporate a managed account solution like Financial Engines. If we want to use target-date funds as they re designed and try to default participants into age-appropriate portfolios, the best thing to do, we think, is to deliver a market portfolio in a transparent, straightforward way at a low cost. Scott Conking: So just adding onto that question: Sometimes I hear from plan sponsors that they have a DB plan for their employees. How would that affect their decision? Matt Brancato: The DB question is a great one. We do hear that a lot in the marketplace. I think it highlights the problem with trying to customize across a population. It s not necessarily very often that you have either a DB plan or you don t have a DB plan. Increasingly today, we see plans that have frozen plans or partially frozen plans, and so a portion of your population may have access to that defined benefit. And so then the question arises, do you construct multiple glide paths? Obviously there s associated cost and complexity with that. So the difference really is at the individual level, and we would emphasize that a managed account program like Financial Engines ends up making a lot of sense. Scott Conking: What if the plan sponsor feels they have special characteristics or special needs of their participants or their plans, in particular? Matt Brancato: Yeah, another great question. We do receive this quite a bit. We ve seen the conversation in the marketplace is a little bit losing the forest for the trees. So age is a really important factor, and we obviously take that into account. But once we get into other demographic characteristics that you want to account for, they become second-order issues. So we think it makes sense to think broadly about asset allocation, focus on what you can control like cost and savings. Scott Conking: Great. John, I m going to come back to you, and naturally, effective communication is really important when communicating to participants in the plan. What does the DOL have to say here? John Schadl: So the DOL says here, as it does with many plan sponsor communications to participants, the participants need adequate information so that they know what it is that they will be investing in. And so there s an implication there around education. You want to make sure the participants understand the investment and understand how it s going to be used within the plan, but also the DOL harkens back to its prior participant fee disclosure rule where there was certain information for each investment that had to be given about the investment s fee structure and the performance of the investment and certain other information. And so you have to make sure that you re complying with that prior fiduciary duty around the fee disclosure, and that plays into the disclosures that you re doing here.
The DOL then also suggests that maybe some additional disclosure around the nature of these funds and whether or not they re guaranteed is important. So they suggest the participant should receive a disclosure that says the fund is not guaranteed at any time and that the participant may lose money investing in the fund even at the target date or beyond the target date. Now we have commented on that during some prior rounds of regulation proposal. The DOL had previously proposed some target-date fund proposed regulation around disclosures and Vanguard has commented, as did many others in the industry. And in our comment letter, we said, Hey, maybe we don t want to put too much emphasis on the risk of loss within these investments as compared to any other investment that exists in the plan, and so maybe in the standard SEC disclosure that we have that says past performance is not a predictor of future results is a good disclosure for these funds as it is for other funds and at most, maybe some additional disclosure to say these funds aren t guaranteed at any time, including at or beyond the target date. Scott Conking: Have we covered it all at this point? John Schadl: We ve covered most of it. The DOL has one last tip that says that you need to make sure you re considering all of the information that is, that you can get access to so information from the provider, any public information that you can see, any information that you might get from any other providers, including consultants if you re utilizing them. And then I would just emphasize once again the importance of documentation. Documentation for the plan sponsor is critical when you re going through the selection process, when you re going through the monitoring process. Make sure that you re documenting all the decisions that you re making and even if you decide not to make any changes, document what it is that you considered, all of the information that you considered, and document your decision to take action or not to take action. Scott Conking: So we ve covered a lot of ground here with all of the seven tips as we ve carried them through. We re going to turn now and take some questions that were submitted from the audience. I m going to do a combination. I m going to take some that were presubmitted and I ll take some live questions, as well, and we ll go back and forth. Anything that we have not answered, your relationship manager will be sure to get back to you with a response. So the first question that has come in it was presubmitted is from a plan sponsor in Phoenix, Arizona. I m going to read it verbatim here: Should a participant stick to having one target-date fund in their fund selection or would multiple target-date funds be suggested? So Matt, why don t you take that one? Matt Brancato: Absolutely. Really there s no need to invest outside of the single target-date fund. We do notice that many plan participants will invest with the target-date funds as a core and then complement that, and that s perfectly fine, but you don t actually need to do that. It is a highly diversified portfolio.
Scott Conking: Okay. So something along similar lines, and this is from a plan sponsor in Omaha, Nebraska. Thank you for this question. If your target retirement date is not one of the dates offered, for example, 2028, which offered target-date fund should you pick, 2025 or 2030? It s really a rounding up or rounding down question. So Matt, why don t you continue on with that question. Matt Brancato: Sure, absolutely. You can approach this in a couple different ways. You could sort of look at it and if you want a slightly more aggressive allocation, you could go for that sort of longer-dated fund that s slightly less aggressive. Or you go with the shorterdated fund. The difference is really at the margins in terms of asset allocation and ultimately outcomes. The other approach is to take is just to round. If you re a little bit closer to that upper date, go for the upper limit of it. Correspondingly on the downside. Scott Conking: John, I m going to turn to you and you touched on it in your actual talk. This is from a plan sponsor in Massachusetts: What are the steps to document our fiduciary responsibility? our being the plan sponsor. John Schadl: So in some respects, it ll depend on what stage you are at. Are you choosing the fund? Are you monitoring the fund? When you re choosing the fund, I would say in your regular meeting minutes of whatever the body is that s making the decision often that s your investment committee, but it might just be your broader plan committee talk about in the minutes all the same things you would have in the ordinary structure of your minutes; who attended, and then what were the considerations that went into the decision, what s any of the documentation that you relied upon in making the decision, and then make sure that you document the decision one way or the other. As you re going through a monitoring process, we see that plan sponsors regularly at a quarterly meeting that they will have with their committee will say, Alright, we re going to review the investments and make a determination about whether or not all the investments are performing as they expect them to perform, whether or not there are any changes, and then again, documenting either just to say broadly all of the investments are performing as expected and no changes are required. Or if you go into some deeper analysis of a particular investment, if you re analyzing your target-date funds more closely, you might say, Here s the information that we considered and then here s the decision we decided to make to either make a change or stay with the investment as it is. Minutes is more of an art than a science, and you want to make sure you re including adequate information to show what it is that you considered and to make sure that the record of your good action within the plan is adequately reflected. But you don t want to go too far into the minutia, so you have to strike a balance between getting too deep into the weeds, but you want to make sure you show all the things you considered. Scott Conking: Okay, yeah, keep a good record of that. Okay, I want to turn to a live question right now coming in from Chicago: How much is a rise in target-date fund participation (managed account programs) attributable to the 2008 market decline? Matt, you want to try that one?
Matt Brancato: Sure, yeah, I ll give it a shot. I think most of the increase in popularity of target-date funds actually traces back to the 2006 Pension Protection Act that we touched on earlier. And so when you get into an environment where you re autoescalating and autoenrolling, there is growth embedded within the target-date fund space. We have seen, on a discretionary basis, that there also is a growing popularity among retail investors, for instance, and so that is a piece of it. So a crisis like 2008 I think should highlight the importance of a balanced, diversified approach, which is exactly what s delivered in a target-date fund. So I think to a degree, that sort of facilitates the popularity. John Schadl: I guess I would just also add that when you re using these target-date funds as a default within your plan, these are often your least engaged and your least investmentsavvy participants, right? So they weren t necessarily focused on what s happening in the marketplace. They were going in because they were defaulted into that investment and they rode through the crisis. We saw that very few participants were going in and making changes. Scott Conking: And we saw that actual behavior, so that s good. Okay, a presubmitted question from Cambridge, Massachusetts: How will a target-date fund risk be protected adequately from sudden interest rate increases? This is especially important for those participants close to retirement age and they may suddenly lose a substantial amount of value. So Matt, that sounds like you. Can you take this question? Matt Brancato: Absolutely, yeah. This is somewhat of the topic du jour today. There s been a lot of questions about bond risk within target-date funds. I will first just harken back to it. Just a few years ago there was a lot of critique that target-date funds actually had too much equity in them, so I would highlight this as a little bit of a headline risk. And so it s important to step back and really try to take an analytical approach to understanding really what the possibilities are here. So a target-date fund is a balanced portfolio in that it delivers stock and bond exposure. Those asset classes do interact with one another throughout time and depending on circumstances, right? So it s not the case that we re necessarily going to experience a sudden rise in interest rates. There have been long periods of time in the past when we ve, in fact, experienced lower interest rates. From 1925 to 1960 we saw interest rates between 1.7% and 4%. There s little in the economy to suggest that we re necessarily going to have that spike today. And then even if it does occur, the interaction between stocks and bonds is really what you want to focus on, not just the impact to stocks, and so the reason that you hold that balanced portfolio is to weather yourself through different periods. Trying to markettime has not been a proven successful strategy for plan participants or investors. Scott Conking: Okay, thanks, Matt. I m going to turn to a live question off the monitor here, and this is coming in from Florida. I think both of you can answer this question. Matt, you can start: How do you evaluate the universe of target-date funds?
Matt Brancato: Sure, absolutely. So there have actually been a host of takes at this out in the marketplace. Some actual asset managers have taken a crack at looking at the universe of target-date funds, and other third-party providers have tried to do the same thing. So some of the better ones out there I think holistically evaluate things like parent philosophies with qualitative and quantitative aspects of target-date funds, and I think that third-party take ends up often becoming very valuable. John Schadl: Yeah, I think that s right. I mean, again, I think we need to remember that plan sponsors are held to a standard as a fiduciary to make sure that their determinations are reasonable, and so you re not required to go to the very ends of the earth scouring every possible investment that can be in there. You can limit the universe you re looking at either by working with a service provider, or if you feel like you need additional expertise, you can engage a third-party, a consultant, to come in and say, Hey, help me weed through and here are the things that I want to accomplish. And then that third party can help you by saying, Alright, these are the funds that are the universe that you might choose from. And as long as you are reasonable in the determination that you make and that s consistent with the best interests of your participants, you re going to be in good shape as a fiduciary. Scott Conking: Thank you both. Kalamazoo, Michigan: What kind of communications do you suggest we provide to TRF holders, or Vanguard Target Retirement Fund holders, to explain to them that bond prices, in that TRFs that hold heavy concentrations of them, will go down if bond yields begin to rise? So it s similar to a prior question, but a little bit different. Matt? Matt Brancato: Yeah, absolutely, and here I ll just emphasize that the low-rate environment does exhibit or cause more risk than or within the bond space than has been in the past. So the fact that we have low interest rates does provide some risk that you ll have a loss in the principal value of bonds. I mean, also it does reduce somewhat the diversification benefits that bonds provide relative to equities. But again, if we re taking sort of a longer-term balanced approach, stocks and bonds interact in a very unique way and bonds absolutely still have a role in a diversified portfolio. So we don t recommend any particular communication go out relative to bonds because we re talking about a well-balanced, diversified portfolio that should be sort of built for the long term. Scott Conking: Okay, great. Thanks, Kalamazoo, for that question. Lynchburg, Virginia, and again I think Matt this is probably appropriate for you: Some people believe they have eliminated investment losses by choosing target-date funds. Their assumption is that all investments have been moved out of equities based on the date of the target-date fund they choose. Can you respond to that? Matt Brancato: Yeah, we ve looked at this issue a little bit in the marketplace. We actually did a survey in 2010 and found that 2% of target-date fund holders within the IRA space and 4% of target-date fund holders within the plan participant space view there to be a guaranteed return embedded within target-date funds. So it s, I think, a limited population to some degree. There have been some other studies that have pointed to a higher number. We do plan to go out again later this year and do another survey and take a crack at it. But I think target-date funds are an investment subject to risk as are other investment options and should be treated as such. Scott Conking: Okay, good. Just a couple more here. From Reading, Pennsylvania, right up the road: If someone has TRF 2015, how will the account values be invested in 2015? Good question, actually.
Matt Brancato: Absolutely. So the name of the fund refers to when the retirement date is expected to occur. For us with that through approach, we have a 50% allocation to bonds and 50% equities at the point of retirement, and we think that that s the right balance between equity risks, so in other words, market risks, longevity risk, and inflation risk. Within the equity and bond sleeves, you have a highly diversified sub-asset class exposure So if you have a 70/30 mix of international and domestic stocks within the equity sleeve and then you have an 80/20 mix of domestic and international bonds within that bond sleeve, then obviously within there you have a highly diversified set of investments. So 50/50 at retirement, balances a whole host of risks. Scott Conking: Okay, great. I have one question left; one that was presubmitted, and it came in from New York City, and it s a question I get from plan sponsors all the time: How can we benchmark these funds to make sure they are performing as expected? So Matt, that goes to you, too. Matt Brancato: It s my lucky day. We benchmark our funds against a composite, so it s a weighted average of the underlying fund indexes, and that allows us to look at tracking error and monitor performance over time. We think that that s a good way to again, monitor those two pieces, and it actually is a big benefit of our target-date funds in terms of how they re constructed. So again, we have these five broad asset classes, and that allows you to have more transparency in terms of how your target-date funds perform against broad market indexes like the Dow Jones, like the S&P 500. A lot of other fund providers have these narrower slivers of the market and benchmarking does provide a little bit more of a challenge in that environment. Let s wrap it up here and again, thank you, John and Matt, for being here. I really appreciate it. I ve enjoyed this conversation. I hope you in the audience have as well. Thanks to you for contributing questions and for attending. For more on target-date funds and the recent tips document, please go to Vanguard s institutional website. We ll also include the links in an e-mail that will let you watch a replay of today s webcast. So thank you for watching. Have a good day. Important information For more information about Vanguard funds, visit institutional.vanguard.com or call 800-523-1036 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date. All investments, including a portfolio s current and future holdings, are subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer s ability to make payments. The Vanguard Group has partnered with Financial Engines Advisors LLC to provide subadvisory services to the Vanguard Managed Account Program and Personal Online Advisor. Financial Engines Advisors LLC is an independent, federally registered investment advisor that does not sell investments or receive commission for the investments it recommends. Advisory services are provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor and an affiliate of The Vanguard Group, Inc. (Vanguard). Vanguard is owned by the Vanguard funds, which are distributed by Vanguard Marketing Corporation, a registered broker-dealer affiliated with VAI and Vanguard. Neither Vanguard, Financial Engines, nor their respective affiliates guarantee future results. Institutional Investor Group P.O. Box 2900 Valley Forge, PA 19482-2900 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. TIPSWS 072013