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Vanguard Target Retirement 2055: Why the Minimum Initial Investment?

Vanguard recently released a new mutual fund: Vanguard Target Retirement 2055. As you might imagine, it’s basically the same as their existing 2050 fund, but with each of the asset allocation changes scheduled to occur five years further into the future.

For the most part, I like Vanguard’s target retirement funds. But I’ve got one big question, especially regarding this new one: Why not get rid of the $3,000 minimum investment?

If you’re not planning on retiring until 45 years from now, you’re obviously quite young. In fact, there’s a very good chance you’re still in school.

It’s been a few years since I was in school, but I suspect that one aspect of college hasn’t changed: Most college students (even those interested in investing) don’t have $3,000 sitting around.

What’s the Point of the $3,000 Minimum?

Was the $3,000 minimum initially intended to discourage people from trying to pick a whole slew of different funds rather than a simple, 3-4 fund portfolio of diversified, low-cost index funds? If so, that seems like a non-issue in this case. Most investors interested in target retirement funds like the idea of investing in just one fund — that’s the whole point.

Or, perhaps, does the $3,000 minimum exist simply to ensure that Vanguard receives a certain level of revenue per new investor?

Would You Pay $4.75 for a New Client?

Vanguard Target Retirement 2055 has an expense ratio of 0.19%. That means that an investor with $3,000 in the fund would provide Vanguard with $5.70 in annual revenue. If Vanguard were to cut the minimum investment down to, say, $500, the revenue per new investor would decline by $4.75. And in the process, they’d become accessible to many more student-investors.

Yes, Vanguard would almost certainly be losing money on each investor who only invested $500, as there would still be administrative expenses associated with their accounts.

But Vanguard would have a new customer — one interested in hands-off, index investing.  (Essentially the ideal Vanguard client, no?) And, in just a few years, that investor will likely be out in the workforce. She’ll have more money to invest. And she’ll already have an account with Vanguard.

I could be wrong, but I’d suspect that Vanguard’s current marketing strategy (i.e., advertising in mainstream media) results in an average cost of far more than $4.75 per new client.

I like Vanguard a lot. Most of our own retirement savings are invested through them. But with that $3,000 minimum, Vanguard seems to be saying that they’re not particularly interested in having the business of young investors. Instead, when I get emails from college-age investors, I typically recommend Schwab because of their no-commission, low-cost ETFs.

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Comments

  1. Great question. I’ve often wondered the same thing but went with ETF’s that mimic Vanguard.

  2. Much of my own savings is in Vanguard ETFs as well.

    With their low share prices (measured in dollars, not in terms of P/E or anything like that), Vanguard’s ETFs would be appealing to brand new investors. But Vanguard’s $20 annual fee for a brokerage account makes them more expensive than, say, Schwab or Fidelity.

  3. They could even limit their losses by making removing the minimums and instituting a $5/year fee for accounts under $3000. However, I suspect that you are correct that $4.75/new customer is a bargain.

    -Rick Francis

  4. I’ve been confused by this as well. If Vanguard wants to keep the fund minimums, perhaps it can at least create ETF shares for those target-date funds? Many investors starting out do not have $3,000 to deposit right away.

  5. I wonder if it’s got anything to do with customer volatility, e.g., maybe customers who invest $3,000 have a better track record of staying invested long term.

  6. I’ve been confused by this as well. If Vanguard wants to keep the fund minimums, perhaps it can at least create ETF shares for those target-date funds? Many investors starting out do not have $3,000 to deposit right away.

  7. At a minimum they should set the amount to be $1000 which matches their STAR fund minimum.

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