I worked at Vanguard for 8 1/2 years. I have described their managerial style as "driving you insane, and then calling you crazy." Despite being away for over 7 years and counting, they still find ways to continue that methodology.
Last month, Vanguard made a decision for its 401(k) plan participants that baffled me greatly. It eliminated numerous funds from its line-up, including my Vanguard Explorer Fund and Vanguard High-Yield Bond Fund. Inexplicably, it moved the balance of those closed funds into their target retirement funds. I like target retirement funds. For my friends who do not care about investing or markets or rebalancing or any of this jazz, the target retirement funds are great! These funds handle that part for those people. They work great, *IF* that is the only fund in the account!
Mixing target retirement funds into an existing allocation would be incredibly complicated for tracking, and more importantly, generally unnecessary. Instead of investing in the target retirement fund, add the funds that make up the target retirement fund into your existing allocation. Which was how I handled this predicament here. The fact that Vanguard found it prudent to talk out of both sides of its proverbial mouth concerns me though, and I suspect that it may be only a matter of time before this behavior extends beyond its staff and begins to drive its customers crazy.
The target retirement fund consists of the Total Stock Market Index Fund (got it), Total International Stock Index Fund (got it), Total Bond Market Index Fund (got it), and Total International Bond Index Fund (need it). Therefore, I will introduce the Total International Bond Index Fund into my account and set its allocation based on the fact that it is both a bond fund and an international fund. For numerous years, I quietly held the Vanguard GNMA Fund, although its performance has not warranted special treatment. Now that I have been forced to rejigger my entire allocation, I will throw that fund out of the mix. It has been considered for years, alongside rising my international exposure.
Missing from this line-up is my precious PRIMECAP Fund, which I feel grateful that fund was retained in a small roster of so-called "supplemental investments." Their description of these alternative funds would be how most active investors would achieve their target allocation. In particular, my exposure to the Explorer Fund skewed my risk profile higher, and I was comfortable with that increased risk because I had a higher exposure to the bond markets simultaneously.
Therefore, I felt my prior allocation was more robust than the target retirement fund. Simple workaround though, I could take the existing target retirement fund's allocation and apply it to my account since there is enough carry over. However, I do not like its 60/40 split between domestic and international stocks. I would sooner have a 80/20 split, but I will split the difference and make mine a 70/30 split in both stocks and bonds (Vanguard has a 60/40 split in stocks but a 70/30 split in bonds).
My new allocation will have 30% allocated to both the Total Stock Market Index Fund and PRIMECAP Fund, 25% allocated to the Total International Stock Index Fund, 11% allocated to the Total Bond Market Index Fund, and the remaining 4% allocated to the new Total International Bond Index Fund (although I might later adjust the bond split to 10.5% and 4.5%, respectively to reflect a 70/30 split).
For the sake of interest, the other supplemental investments were Vanguard FTSE Social Index Fund, Vanguard International Growth Fund (any domestic growth/value counterparts are conspicuously absent), Vanguard Long-Term Investment-Grade Fund, Vanguard Retirement Savings Trust (in addition to Vanguard Prime Money Market Fund), Vanguard Short-Term Investment-Grade Fund, and three other balanced funds: Vanguard Wellesley Income Fund, Vanguard Wellington Fund, and Vanguard Windsor Fund. No mid- or small-cap funds, which concerns me slightly and perplexes me greatly.
I am not sure what Vanguard was thinking in this decision, especially considering its most loved fund (Vanguard Index 500 Fund) was completely excluded. Based on the number of lawsuits on 401(k) providers for having poor selection choices, making this move now could be inviting a lawsuit. I am certainly disappointed with Vanguard, but having worked there before, it is a familiar feeling.
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