Call it the Fidelitization of Vanguard. Taking a page from Fidelity's book, Vanguard announced it will launch a series of six targeted retirement funds. The funds are asset allocation funds whose allocations slowly shift as the shareholder ages, nearing retirement.

Target Retirement Income is the most conservative of the offerings with just 20% of assets invested in stocks and 75% in bonds (5% is allocated to cash). Target Retirement 2045, by contrast, is aimed at investors who will retire in 2045 and want to reach an allocation similar to Target Retirement at that time. The fund starts life with 90% of assets in stocks and 10% in bonds and slowly grinds away at the equity allocation.

The funds will use only Total Stock Market (VTSMX) for its domestic equity allocation, European Index (VEURX) and Pacific Index (VPACX) for a foreign flavor, and just three income funds to round out the portfolios. As the table below shows, operating expenses are expected to be quite low.

Fidelity has seen enormous success selling its targeted retirement fund Fidelity Freedom 2020,which has taken in over $5 billion in assets, as well as its Freedom 2010. (Fidelity's funds, all but one of which were started in 1996, run from Freedom 2000 to Freedom 2040 in 10-year increments and finally reach Freedom Income at their most conservative. Amazingly, the five funds that started in 1996 have very close to the same returns since inception having endured bull and bear markets in stocks, and now bonds.)

It's surprising to see Vanguard's strategic shift in these latest funds of funds. First there was STAR, which used only actively managed funds to produce a balanced fund of funds. Then came the LifeStrategy funds, with their reliance on Asset Allocation for strategic asset shifts as well as Short-Term Corporate for the "cash" portion of the portfolio. Now Vanguard has given in completely to the indexing crowd with its use of just three indexed equity funds and one indexed bond fund. And cash, in the form of Prime Money Market, replaces Short-Term Corporate at a time when yields are at record lows.

Though barely tested, the use of Inflation-Protected Securities (VIPSX) is a way to expand the fixed-income portion of the portfolios beyond the typical bonds found in the index fund. These funds are very different from the ones used by Vanguard's asset management group, which presumably creates portfolios for rich retirees as well. Clearly there are many ways to slice the retirement pie, and Vanguard is, like Fidelity, sharpening its knives in readiness.

Investors in the new Vanguard funds may be surprised at how risky the funds can be over short time periods. For instance, using historical performance I've calculated that investors in Retirement 2045 could endure a one-month loss greater than 18% at worst, and a one-year loss of more than 27%. Risk doesn't drop dramatically until you begin to cut the stock portion of the portfolio to less than 40%. Vanguard will have its work cut out for it explaining the risk involved in these funds when many investors looking for a "simple" retirement solution may expect low risk as part of the package.

Look for these funds to make their debut toward the end of October. And look for us at The Independent Adviser for Vanguard Investors to provide you with the latest news and advice on investing in these new funds of funds, as well as all the Vanguard funds.

Targeting the Retirement Market
	Total Stock Market	European Index	Pacific Index	Total Bond Market	Infl. Prot. Securities	Prime M.M.	Target Age	Operating Expenses
Retirement 2045	72%	13%	5%	10%			20s	0.23%
Retirement 2035	64%	11%	5%	20%			30s	0.23%
Retirement 2025	48%	8%	4%	40%			40s	0.23%
Retirement 2015	40%	7%	3%	50%			50s	0.23%
Retirement 2005	35%			50%	15%		60s	0.21%
Retirement Income	20%			50%	25%	5%	70s	0.21%

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