Mutual Fund Giant Agrees to $40 Million Settlement
Tax Bill Bombshell for Retirement Savers
Vanguard Group, the largest manager of mutual fund assets in the US, has agreed to pay $40 million to settle a lawsuit alleging it stuck ordinary investors with unexpectedly large tax bills. The proposed class-action settlement, filed in Philadelphia federal court, requires judicial approval.
The Backstory
The lawsuit stems from Vanguard’s December 2020 decision to lower the minimum investment threshold for institutional clients from $100 million to $5 million. This move sparked a rush into lower-cost funds, forcing higher-cost retail funds to sell assets to meet redemption requests. As a result, investors who didn’t qualify for the lower-cost funds were left with significant capital gains in their taxable brokerage accounts.
The Fallout
One Vanguard fund, the Target Retirement 2040 Fund, distributed an estimated 15.1% of its net asset value as capital gains in 2021, a staggering increase from 0.4% in 2020. Vanguard’s target-date funds are designed to be tax-efficient and become less risky as investors age.
Vanguard’s Response
The Valley Forge, Pennsylvania-based company, which manages $9.9 trillion in assets, denied any wrongdoing. In a statement, Vanguard expressed commitment to supporting everyday investors and retirement savers, and welcomed the opportunity to put the litigation behind them.
Previous Settlement
This is not Vanguard’s first settlement related to this issue. In July 2022, the company agreed to pay $6.25 million to resolve similar claims brought by Massachusetts Secretary of State William Galvin.
The Payout
Lawyers for the investors may seek up to $13.33 million in fees, $985,000 in expenses, and $240,000 for the 12 named plaintiffs, leaving around $25.4 million for other investors. The lawyers estimate that the “best case” scenario for damages would have been $259.5 million, making the $40 million recovery an “excellent result.”
The Case Details
The case is In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.
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