For institutional use only. Not for distribution to retail investors.

Target-date fund

trends and innovation

2For institutional use only. Not for distribution to retail investors.

Agenda

Target-date

fund (TDF)

landscape

and trends

What’s next

in TDF

innovation?

3For institutional use only. Not for distribution to retail investors.

TDF landscape

and trends

4For institutional use only. Not for distribution to retail investors.

A brief history of the target-date industry

Annual target-date assets under management (AUM)

$0B

$300B

$600B

$900B

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Asse

ts u

nd

er

ma

na

ge

me

nt in

$B

Vanguard Fidelity Investments T. Rowe Price BlackRock JPMorgan Other

2003

AUM: $25B

Vanguard enters

target-date industry

1997

AUM: $2B

Fidelity enters the market and

owns 50%+ of it until 2006

2013

AUM: $850B

Vanguard overtakes Fidelity

for market leadership

2006

AUM: $126B

Pension Protection Act

passed

1993

AUM: $0

The first TDFs are launched

Sources: Vanguard, Morningstar, company public filings, as of December 2013.

5For institutional use only. Not for distribution to retail investors.

Institutional pricing is gaining ground through the use of collective trusts

Target-date funds versus collective trusts in retail and institutional assets

(in $M)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Dolla

rs in

$M

Mutual funds Collective trusts

Note: Excludes custom TDFs.

Sources: Greenwich survey of plan sponsors, May 2014; Morningstar, Pension & Investments, Vanguard, company public filings.

30%

Approximately one-fourth of plan sponsors

with more than $100M prefer CITs

6For institutional use only. Not for distribution to retail investors.

$0.0B

$10.0B

$20.0B

$30.0B

$40.0B

$50.0B

$60.0B

$70.0B

$80.0B

$90.0B

$100.0B

Index-based TDFs are gaining ground

2012 was the first year that passive cash flows outpaced active:

First year where

passive

outpaced active

2006 2007 2008 2009 2010 2011 2012 2013

Active Other passive Vanguard

Sources: Greenwich survey of industry wide plan sponsors, May 2014; Vanguard; and Morningstar, as of December 2013.

$0B

$10B

$20B

$30B

$40B

$50B

$60B

$70B

$80B

$90B

$100B

2006 2007 2008 2009 2010 2011 2012 2013

72% of plan sponsors with more than $100M

prefer the use of passive funds in a TDF

7For institutional use only. Not for distribution to retail investors.

The number of TDF options has grown significantly since 2006

Number of TDF options available in the marketplace and top 5 share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013 2014

Sh

are

of to

p 5

co

mp

etito

rs*N

um

be

r o

f T

DF

op

tio

ns

Now available Closed Share of top 5

Note: Top 5 competitors: Vanguard, Fidelity, BlackRock, T.Rowe Price, and JP Morgan.

Sources: Greenwich survey of industry wide plan sponsors, May 2014; Vanguard; and Morningstar, company public filings, as of March 2014.

Two-thirds of plan sponsors and consultants believe there will be

significant changes to the design of target-date investment solutions

that will make them a better investment option

8For institutional use only. Not for distribution to retail investors.

Alternatives are gaining more attention than traction

Percentage of DC funds using TDF strategies that include select alternatives

(among the top 200 plans)

0%

20%

40%

60%

80%

100%

Private equity Annuities Hedge funds Real estateequity

Commodities REITs TIPS

2011 2012

Adoption considerations

Tailwinds

• Potential diversification

• Single-fund-solution structure

protects misuse

Headwinds

• Higher costs

• Implementation concerns

• Liquidity

Sources: CNBC, Pension & Investments, McKinsey: The Mainstreaming of Alternative Investments: Fueling the Next Wave of Growth in Asset

Management, 2012, Plansponsor.com.

9For institutional use only. Not for distribution to retail investors.

Most custom TDFs still have a meaningful performance hurdle

Costs by TDF selection: Options for clients with $1B+ in TDF assets

0

20

40

60

80

100

Vanguard TRT Plus Industry-wide indexoff-the-shelf TDF

Indexed custom TDF Active custom TDF Industry-wide activeoff-the-shelf TDF

Cost in

ba

sis

po

ints

Investments Glide path construction and administration

7 bps

~17 bps

~53 bps

94 bps

12 bps

Source: Vanguard.

10For institutional use only. Not for distribution to retail investors.

What’s next in

TDF innovation?

11For institutional use only. Not for distribution to retail investors.

When innovating, where do we spend our time?

Focus on the elements that drive investor returns

Source: Vanguard, 2012.

79%

86%

90%

78%

83%

86%

83%

86%

87%

Participant

behavior

Plan designReturnsInvestor

returns

Savings and cost

matter mostThe glide path drives

investment returns

Cost Glide path

Probability of a positive balance

at age 85

Saving rates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Self-directedinvestors

Managedaccounts

TDFs

A 50/50 mix at retirement

matches risk tolerance

Distribution of equity allocation

at age 65

Factors driving long term

return variability

1 2 3

88%

12% Security selection and market-timing

Asset allocation the glide path

-10% +10%Baseline -10% +10%Baseline-20% Baseline-10%

12For institutional use only. Not for distribution to retail investors.

What’s on the horizon for Vanguard?

Constant debate, not constant change

Inception

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

• Adds exposure to

Vanguard Emerging

Markets Index Fund

• Vanguard increases

minimum equity

allocations in the funds

from 20% to 30%

• Vanguard increases

international equity

allocation in the funds

from 20% to 30% of

total equity

• Replaces the three

underlying international

equity index funds

(Europe, Pacific, and

Emerging Markets)

with Vanguard Total

International Stock

Index Fund

• Vanguard adds a

20% fixed income

allocation to

Vanguard Total

International Bond

Index Fund

• Replaces Inflation-

protected

Securities Fund

with Short-term

Inflation-protected

Securities Fund

• Eliminates Prime

Money Market

Fund and

reallocated to the

other fixed

income

components

Vanguard launches

Target Retirement

Trusts

Vanguard announces

benchmark changes

1 2 3Type of change

• Broadening global

exposure

• Match participant

behavior

• Simplification

Type of change

• Driving costs down

Recent research

and today’s debates

• What’s the right

mix of US/ex-US

stocks & bonds?

• What level of human

capital empirically

exists for investors

in their 60s and

70s?

• Does market-cap

weighted fixed

income exposure

still make sense?

• Do liquid

alternatives have

a place in a TDF?

13For institutional use only. Not for distribution to retail investors.

Important information

For more information about Vanguard funds, visit 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 the

Target Retirement Fund is not guaranteed at any time, including on or after the target date.

Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and

their eligible participants. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a subsidiary of

The Vanguard Group, Inc.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit

or protect against a loss.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other

government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share,

it is possible to lose money by investing in such a fund.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Vanguard Total International Bond Index Fund is subject to currency hedging risk, which is the chance that currency hedging

transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit

from favorable fluctuations in those currencies. The fund will incur expenses to hedge its currency exposures.

Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to

the risk of currency fluctuations. These risks are especially high in emerging markets.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and

currency risk.

© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. TRFPIBPR 062014

14For institutional use only. Not for distribution to retail investors.

Important information

For more information about Vanguard funds, visit 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 the

Target Retirement Fund is not guaranteed at any time, including on or after the target date.

Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and

their eligible participants. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a subsidiary of

The Vanguard Group, Inc.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit

or protect against a loss.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other

government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share,

it is possible to lose money by investing in such a fund.

Investments in bonds are subject to interest rate, credit, and inflation risk.

Vanguard Total International Bond Index Fund is subject to currency hedging risk, which is the chance that currency hedging

transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit

from favorable fluctuations in those currencies. The fund will incur expenses to hedge its currency exposures.

Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to

the risk of currency fluctuations. These risks are especially high in emerging markets.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and

currency risk.

© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. TRFPIBPR 062014