Note: This article was slightly modified from the original post, published at on 09/05/2006.

I know my writing often sounds like I’m preaching for everybody to be value investors. That’s simply not true! I only feel that some people can be value investors due to the temperament and the time needed to perform analysis. So what do I tell the general public who couldn’t care less about reading financial statements, or sitting in front of the computer day-trading?

Mutual funds are still the no-brainer solution for the average joe. Much “marketing” debate has been made about management fees. They’re not wrong to be critical but everything is really dependent on the “net” returns you’re able to achieve. My only concern is that consumers do the minimum work of researching the track-record of the fund and the fund manager. A long, consistent and positive tracking record is a must for active-managed funds.

But when John Bogle, founder of Vanguard, decided to balk the norms of the financial industry and aggressively market passive index funds, it was a strong indictment on the vast majority of managers who fail to beat their corresponding benchmark indexes. Vanguard’s promotion of this strategy still trumpets strongly, but there are signs of shifting towards actively managing their index funds, even if it’s just a little bit!

The Winds Of Change
The U.S. Senate recently passed the Pension Protection Act of 2006. Fellow InvestorGeek Kevin Hamrick had previously posted on the event. The new legislation makes it easier for retirement plan sponsors to offer investment advice to plan participants. Employers can implement auto-enrollment, and automatic increases in contributions; making employees opt-out rather than opt-in. There were also the obligatory updates to contribution limits.

What do all these changes mean? For starters, plan sponsors now feel more pressure than ever to take an active role in managing retirement accounts. All this time, we thought that the shifting to defined contribution plans, away from traditional defined benefit pension plans was to shift the responsibility back to investors. The “handcuffs” companies gave as excuses have now been released. With everything coming full-circle again, employers feeling helpless are looking to fund companies like Vanguard, Fidelity and T. Rowe Price for assistance.

Vanguard’s Target Retirement Funds – Active Management?
Many plans are making their first implementation by updating their “default” fund selection. Gone are the Stable Value and Money Market funds. In their place are life-cycle funds adhering to asset-allocation principles while correlating them to age and retirement years. The Vanguard Target Retirement (TR) funds (most not even 3 years old!) have been a popular adoption into many retirement plans as of late.

Essentially the Vanguard TR funds are a fund-of-funds that leverage Vanguard’s existing offerings of index funds. My eternal gripe with fund-of-funds are that they often include “under-performing” funds from the company’s offerings. These inclusions are not necessary by merit, but more of a business decision to boost a new unproven fund inception, or boost an unpopular / declining fund’s asset. But I admit that this concern seems different when index funds are being used.

Observers may argue that Vanguard is deviating from their guiding principle, by offering “active” management of these funds. I tend to agree partially since asset re-allocations and yearly adjustments are not insignificant passive actions! Critics of life-cycle funds note that investors may have different risk tolerance, different portfolio needs; even if they’re of the same age.

However, from my vantage point, Vanguard seems to be continuing their strategy of delivering a “one-size-fits-all” approach to retirement investing. They’re also continuing their ideology that indexes are beating the majority of fund managers by not including non-index funds.

The Brave New World of Retirement Plans
Vanguard already has a stable of actively managed funds, but they have never seen the spotlight. The TR funds however will see a major push with retirement plan sponsors and may mark the first meaningful active Vanguard management in its interaction with investors. With the right marketing, these index-mirroring life-cycle funds will further boost Vanguard’s popularity with retirement plans.

If your plan hasn’t yet adopted similar changes, you should be seeing them within the next five years. Yes, indexes have proven worthy of beating the majority of fund managers. But if I’m a smart shopper, why wouldn’t I be looking for those minority managers that beat their benchmarks consistently? I’m still an advocate for plan sponsors to find and offer proven actively managed funds such as Bill Mason’s Legg Mason Value Trust or Joel Tillinghast’s Fidelity Low-Priced Stock. The shift to life-cycle funds as default funds seems to be a better alternative to the traditional conservative choices.

The problem with the mutual fund industry is that there are too many choices, whether they are actively or passively managed, and only a handful of good ones. You may have differing opinions on which actively managed funds are worthy and I hope you’ll share with us. But keep in mind that I am Canadian and don’t monitor the U.S. mutual fund scene often!

For Canadians, I sincerely hope that governments take more interest than they have, into the employer retirement plans north of the border. However, if we can’t get any help to reform brokerage fees, unreasonably high mutual fund MERs compared to the true cost of operating a mutual fund (especially with the currency exchange where it is right now), there is little hope of any assistance from lazy bureaucrats.