With all this cold weather, I found myself reminiscing about last summer when my wife and I took our three boys to the shore to enjoy one last weekend of fun in the sun (though a pending tropical storm curtailed the sun part). As always, the boys clamored to visit their favorite ice cream shop, and we willingly obliged.
As my 5-year-old got ready to order, a multicolored ice cream—an amalgam of flavors called “Superman”—in the corner of the freezer caught his eye. But it took only a few tastes for my son to decide he’d made a bad selection. After he complained, as 5-year-olds are prone to do, I agreed to share my vanilla cone with him. My takeaway from this story? A shiny object with a really cool name isn’t necessarily the best choice.
As I recounted the tale to some colleagues, I realized this life lesson was applicable to my work. As a senior defined contribution (DC) investment strategist, I spend much of my time talking with our plan sponsor clients about their DC plans and the challenges they face. In an environment of growing scrutiny, plan sponsors are continually called upon to find enduring, holistic investment options that will lead to positive outcomes for their participants.
This scrutiny is no greater than in their choice of target-date funds (TDFs)—the largest and fastest-growing type of investment they provide to their employees. TDFs have grown from approximately $200 billion in assets under management in 2007 to now more than $1.2 trillion.¹
As the TDF marketplace evolves, more providers are highlighting the intricacy of their TDFs’ portfolio construction and the investment benefits that may offer plan participants. When plan sponsors choose TDFs, investment considerations such as sub-asset class inclusion and manager selection are certainly relevant, but it’s also important to take a step back and evaluate the full picture of how these decisions may affect participants, particularly with these vehicles being leveraged as default investment options.
Strategies that are touted as “innovative” and “sophisticated”—the Superman ice cream—may always seem alluring. The challenge for plan sponsors is to identify whether these strategies are lasting. In a world of increasing complexity, it’s reasonable to be compelled by strategies that offer to solve that complexity. But as the past has proved, investors are best served by focusing on the factors they can control.
Vanguard strives to build a holistic, enduring, and transparent investment vehicle that doesn’t sacrifice long-term returns purely for the sake of a seemingly sophisticated investment strategy. We deliver our TDFs in a low-cost, broadly diversified portfolio that draws on timeless investment principles that have proven over the years to produce results. Our most senior business and investment leaders are involved in the construction and governance of our TDFs, and we believe that lends stability to our approach.
I’ve heard our approach to TDFs referred to as plain vanilla, and I think there’s a reason why vanilla ice cream still ranks near the top of the list of best-selling ice cream flavors. Although purveyors of ice cream will continue to churn out new flavors for the public to try, I’ll stick with the dependability that vanilla offers.
I’d like to thank Matt Brancato for his much-appreciated contributions to this piece.
¹Sources: Vanguard, Morningstar, company public filings, as of September 30, 2016.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the 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-date fund is not guaranteed at any time, including on or after the target date.