At Vanguard, which popularized the S&P 500 index funds, workers will no longer be able to choose that option in their 401(k) retirement plan.
The S&P 500 index fund, one of the low-cost examples of passive investing that put the firm on the investing map, will be dropped this month from the mutual fund giant’s menu of options for its employees’ 401(k) plans.
Jim Boyer, who previously worked in Vanguard’s defined-contribution retirement plan division, said the overall menu of funds available are still “great, but why would the firm risk a potential lawsuit by getting away from the S&P 500 index fund in its own retirement plan?”
Boyer said colleagues were upset over the removal of the S&P 500 index fund — an institutional class of shares in the fund that charged just 0.02 percent annually, making it one of the cheapest options. Vanguard pioneered the use of such low-cost funds.
“This is one of the most important funds that put Vanguard on the map and the one most investors associate with the firm,” added Boyer, who was based in the Scottsdale, Ariz. office.
Vanguard painted the slimming down of its fund choices as a better option for employees. Money now in the funds that are being dropped will be transferred into Target Date Retirement mutual funds based on the employee’s age, starting June 25.
“In early May, we streamlined the investment lineup for our retirement plan, eliminating 12 funds,” Vanguard spokesman John Woerth said in an email. The number dropped from 28 funds to 16 funds as choices, if all the Target Date Retirement funds are counted as one option.
“The plan will continue to offer a broad choice of index and active funds, including our popular Target Retirement Fund series; our building-block index funds (Vanguard Total Stock, Vanguard Total Bond, Vanguard Total International Stock, Vanguard Total International Bond), which are among our largest funds; and supplemental choices, such as our oldest active funds (Wellington Fund and PRIMECAP Fund),” Woerth wrote.
The average plan offers 18 funds, Woerth noted, citing How America Saves, the annual report on defined-contribution plan trends.
And, on average, participants use 2.5 percent of the funds offered. A total of 51 percent of all participants invest in a single target date fund. “These stats are for the DC [defined contribution] plans we manage; not Vanguard’s retirement plan offered to crew,” as the firm calls its employees, he added.
The Vanguard Retirement and Savings Plan is a defined-contribution plan with a profit-sharing component and 401(k), according to BrightScope. Vanguard’s retirement plan is ranked in the top 15 percent of all plans in its peer group, according to 2016 data for Account Balances, Company Generosity, Participation Rate, Salary Deferral, and Total Plan Cost.
The Vanguard Retirement and Savings Plan currently has over 17,800 active participants and over $4.6 billion in plan assets, according to BrightScope.
Boyer, who worked at Vanguard for 14 years handling retirement plans for large corporate clients, acknowledged from a fiduciary perspective, it may make sense to simplify and reduce more expensive funds, and “since Vanguard handles over $1 trillion in defined-contribution assets, then the [company’s] plan is held up as a standard for the other plans. However, most of us longtime crew Vanguardians love the small-cap and high-yield funds. In the industry now, low fees are more important than performance and filling an investment style or gap.”
For diversification, the S&P 500 actually is now extremely tech-heavy, the former employee explained.
“The current problem with the Index 500 fund is over 25 percent of the fund is in technology stocks,” while Vanguard Total Stock market fund is better diversified, he said.
Employee funds sailing away
Effective June 25, the following investments will be removed from Vanguard’s 401(k) retirement plan:
- Vanguard High Yield Corporate Fund
- Vanguard Short-Term Inflation Protected Securities Index Fund
- Vanguard Balanced Index Fund
- Vanguard Institutional Index Fund (S&P 500)
- Vanguard Small-Cap Index Fund
- Vanguard Selected Value Fund
- Vanguard U.S. Growth Fund
- Vanguard Morgan Growth Fund
- Vanguard Windsor II Fund
- Vanguard Extended Market Index Fund
- Vanguard Explorer Fund
- Vanguard International Value Fund