Vanguard Adds More Target-Date Funds

Vanguard Group, the No. 2 U.S. mutual fund manager, is almost doubling its offerings of target-date retirement funds to compete with companies such as Fidelity Investments in a fast-growing area of the 401(k) market.

Vanguard, which manages six of the funds, registered five more Monday with the Securities and Exchange Commission. The Valley Forge, Pa.-based company also said in a statement that it would increase the funds’ stock holdings.

Fidelity, based in Boston, said March 1 that it would add two funds and raise stock holdings for potentially better returns.

Target-date funds, also known as life-cycle funds, become more conservative in their investment philosophy as their shareholders near retirement.

Assets in these funds grew 60% last year to $70.1 billion. Fewer companies are providing pension plans, shifting the burden to employees.

Target-date retirement funds are “a steadily growing area,” said Russel Kinnel, director of mutual fund research for Chicago-based Morningstar Inc. The allocation changes will bring Vanguard, which manages $10 billion in the funds, in line with rivals that have more aggressive holdings, he said.

The funds divide investments among a variety of asset classes based on the year a customer wants to retire, gradually shifting to bonds. Many, like the Vanguard Target Retirement Funds, are “funds of funds,” which invest in other funds.

Net sales last year reached $22.3 billion in the industry, 48% more than in 2004 and triple those of 2003. Target-date funds accounted for 8.7% of all fund sales last year, up from 5.6% in 2004.

Fidelity manages more than 60% of all target-date fund assets. The firm’s total increased 39% last year to $43.3 billion, as it took in a net $9.4 billion in sales, according to consultant Financial Research Corp.

Target-date assets at Baltimore’s T. Rowe Price Group Inc., the No. 2 manager of such assets, and Vanguard doubled last year, according to Financial Research.