Author Topic: Target Date Fund Dividends Question  (Read 802 times)

PJS

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Target Date Fund Dividends Question
« on: October 30, 2018, 08:34:28 AM »
Apologies in advance if this is a stupid question, but I'm trying to understand the logic.

I have my entire 401k blance in a Vanguard2050 Target Date retirement fund (I recognize this might not be the best option, but that's a different conversation).

Currently around 90% of the fund is equity, with around 10% in fixed income.

I have to imagine some of the stocks that are included in the 90% equity would pay dividends, however I have been told by our plan administrator that the Target Date 2050 fund itself does not pay dividends.

If that is the case, where do the dividends paid by the stocks that are owned by the Target Date fund go?


**Edited for clarification purposes
« Last Edit: October 30, 2018, 08:42:05 AM by PJS »

DS

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Re: Target Date Fund Dividends Question
« Reply #1 on: October 30, 2018, 08:54:03 AM »
Each underlying fund pays dividends over the course of the year, which are reinvested into the target date fund instantly.

Then at the end of the year, the target date fund is required (by the IRS, for tax purposes) to distribute all dividends received throughout the year.

So the administrator is technically correct that the fund is not "paying" dividends, but it is distributing them.

onlykelsey

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Re: Target Date Fund Dividends Question
« Reply #2 on: October 30, 2018, 09:03:45 AM »
So the administrator is technically correct that the fund is not "paying" dividends, but it is distributing them.
Just to be clear, though, you should have the option to direct Vanguard to re-invest those dividends, I think. I'm not familiar with them as a 401K provider.

PizzaSteve

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Re: Target Date Fund Dividends Question
« Reply #3 on: October 30, 2018, 09:14:14 AM »
Some retirement funds hold the underlying investments in a trust vehicle, where the participant has a share of the trust, not the mutual fund.  In those cases the yearly dividend is reinvestedmwitjin the trust and the nav of the trust then either issues more units or increses the share value as a tax free consequence.  Maybe this is the case for this person.  I had an S&P500 index fund handled that way in a 457b plan.  Either way, it doesnt matter in a 401k, until RMDs are occuring and if it is all pre tax money, taxes are due on withdraw anyway, so no real impact.
« Last Edit: October 30, 2018, 10:16:30 AM by PizzaSteve »

DS

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Re: Target Date Fund Dividends Question
« Reply #4 on: October 30, 2018, 09:19:15 AM »
Just to be clear, though, you should have the option to direct Vanguard to re-invest those dividends, I think. I'm not familiar with them as a 401K provider.

Yes, this is true. They should be set to automatically reinvest, but worth checking.

So basically this is all just for tax purposes (for anyone investing in taxable accounts). Otherwise this particular fund would most likely not make any distributions because it is designed for retirement 30 years from now.

Dividends throughout year -> automatically reinvested into fund -> total is distributed at year-end to show IRS Dividends & Capital Gain amounts (if you were in a taxable account) -> most likely auto-reinvested in the fund (again)

@ Pizza, The OP is invested in the Vanguard 2050 Fund.

PizzaSteve

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Re: Target Date Fund Dividends Question
« Reply #5 on: October 30, 2018, 10:22:32 AM »
Just to be clear, though, you should have the option to direct Vanguard to re-invest those dividends, I think. I'm not familiar with them as a 401K provider.

Yes, this is true. They should be set to automatically reinvest, but worth checking.

So basically this is all just for tax purposes (for anyone investing in taxable accounts). Otherwise this particular fund would most likely not make any distributions because it is designed for retirement 30 years from now.

Dividends throughout year -> automatically reinvested into fund -> total is distributed at year-end to show IRS Dividends & Capital Gain amounts (if you were in a taxable account) -> most likely auto-reinvested in the fund (again)

@ Pizza, The OP is invested in the Vanguard 2050 Fund.
Understand, but through a 401k.  For example, when I researched my 457 (because while it was holding a vanguard fund,the share price and share price appretiation didnt match the data I got from vanguard) I found out their structure was actually to hold the vanguard funds in an intermediary trust.

I mentioned this in case someone held say, VTI in a 401k, but noticed that their share price growth was slightly different that of VTI, as reported in public disclosures.  Most plan admins and company reps would not be able to explain why the share prices might not match. 

In my case, I was just anal enough to ask why the share prices were reported differently in my plan and then I dug into disclosures until I got a solid answer.  Interestingly, this is all required to be reported, as well as additional trust costs, but is usually burried deep within a specific financial report.  It is very likely not material to performance, but can add a small bit of cost.

My specific example comes from IMCA-RC, a popular provider of govt 457 plans.
« Last Edit: October 30, 2018, 10:26:40 AM by PizzaSteve »

onlykelsey

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Re: Target Date Fund Dividends Question
« Reply #6 on: October 30, 2018, 10:26:49 AM »
Just to be clear, though, you should have the option to direct Vanguard to re-invest those dividends, I think. I'm not familiar with them as a 401K provider.

Yes, this is true. They should be set to automatically reinvest, but worth checking.

So basically this is all just for tax purposes (for anyone investing in taxable accounts). Otherwise this particular fund would most likely not make any distributions because it is designed for retirement 30 years from now.

Dividends throughout year -> automatically reinvested into fund -> total is distributed at year-end to show IRS Dividends & Capital Gain amounts (if you were in a taxable account) -> most likely auto-reinvested in the fund (again)

@ Pizza, The OP is invested in the Vanguard 2050 Fund.
Understand, but through a 401k.  For example, when I researched my 457 (because while it was holding a vanguard fund,the share price and share price appretiation didnt match the data I got from vanguard) I found out their structure was actually to hold the vanguard funds in an intermediary trust.

I mentioned this in case someone held say, VTI in a 401k, but noticed that their share price growth was slightly different that of VTI, as reported in public disclosures.  Most plan admins and company reps would not be able to explain why the share prices might not match. 

In my case, I was just anal enough to ask why the share prices were reported differently in my plan and the I dug into disclosures until I got a solid answer.  Interestingly, this is all required to be reported, as well as additional trust costs, but js usually burried deep within a specific financial report.  It is very likely not material to performance, but can add a small bit of cost.
I think that will be true for anything you invest in through a 401(K) because of the 1974 ERISA legislation... now I want to dig up the paperwork from Schwab as my 401K provider.