Vanguard Group, the leading American mutual fund asset manager, has decided to shell out $40 million in a settlement over a lawsuit. The suit alleged that the firm stuck regular investors of its renowned target-date retirement funds with unexpectedly hefty tax bills.
The preliminary settlement of this proposed class-action suit was submitted on Wednesday in a Philadelphia federal court. The settlement awaits the approval of a judge. Despite agreeing to the settlement, Vanguard continues to deny any wrongdoing.
The lawsuit originated from Vanguard’s decision in December 2020 to lower the minimum investment required for lower-cost funds intended for institutional clients from $100 million to $5 million.
According to investors, this decision led to a “rush” into the lower-cost funds. This, in turn, necessitated the higher-cost retail funds to liquidate assets to meet redemptions. As a result, the investors who did not qualify for the lower-cost funds were burdened with substantial capital gains in their taxable brokerage accounts.
For instance, the Vanguard Target Retirement 2040 Fund reportedly threw off an estimated 15.1% of its net asset value as capital gains in 2021, a significant increase from 0.4% in 2020.
Vanguard’s target-date funds comprise a blend of stocks, bonds, and cash. These are designed to gradually decrease in risk as investors age, and are also intended to be tax-efficient.
With $9.9 trillion of assets under management as of August 31, the Pennsylvania-based company, Vanguard, is dedicated to supporting retail investors and retirement savers. The company has expressed relief over reaching an agreement that allows it to leave this legal battle behind.
In a related incident in July 2022, Vanguard agreed to pay $6.25 million to settle similar allegations brought forward by Massachusetts Secretary of State William Galvin.
The legal team representing the investors may seek up to $13.33 million for fees, $985,000 for expenses, and $240,000 for the 12 plaintiffs named in this case. This would leave approximately $25.4 million for other investors.
The legal team believes that the “best case” scenario for damages would have been $259.5 million, but they still consider the $40 million recovery to be a “great outcome.”
The case is In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.
