Investors Allege Vanguard Improperly Caused Large Tax Bills for Investors In Target Date Retirement Funds
On March 14, 2022 investors sued Vanguard for selling off a large amount of assets in target date retirement funds, which caused huge tax burdens for investors.
The lawsuit alleges breach of fiduciary duty and negligence and alleges that Vanguard improperly sold the fund to non-retirement accounts and knowingly damaged investors who were shocked to receive large tax bills.
Target Date Retirement Funds
Target date retirement funds are funds that contain a mix of stocks and bonds tied to a future date when the investor anticipates retiring. As the target date approaches, the fund automatically allocates more money to conservative fixed-income investments like bonds, and less to equities such as stocks.
These funds are popular because investors can simply buy into one fund without having to make decisions about allocating their funds or rebalancing their portfolio as they approach retirement.
Vanguard has $8.1 trillion in assets under management, making it one of the biggest asset managers in the world. Vanguard had two tiers of target date funds. One tier was for institutional investors with more than $100 million, and one was for individuals with less than $5 million. Institutional investors paid a lower fee.
In December of 2020, Vanguard lowered the minimum for institutional investors to $5 million, which caused smaller retirement plans to sell off shares of the retail target fund and buy into the lower fee institutional funds.
When the retail funds sold assets, they realized capital gains that were distributed to the investors and “left taxable investors holding the tax bag,” according to the lawsuit.
The lawsuit states that Vanguard didn’t have to do it this way. It could have lowered fees for the retail funds or combined it with the institutional funds. In September, 2021, Vanguard did merge the funds, causing no tax consequences for investors. But it was too late because, according to the lawsuit “investors had already incurred unnecessary capital gains distributions-and corresponding taxes-that could not be erased.”
The lawsuit was filed in federal court in Philadelphia, and includes three plaintiffs across the country who collectively estimate their tax liabilities will be over $55,000 for the capital gains they received in 2021.
Massachusetts Regulators Settle Case With Vanguard For $6.25 Million
Securities regulators in Massachusetts investigated Vanguard’s marketing of its target date funds in 2022. In July Vanguard settled for $6.25 million. $5.5 million of the money will go towards restitution to eligible Massachusetts investors, who can seek restitution for as much as 65% of the tax liability Vanguard’s actions caused. $750,000 will go to costs the state incurred.
As part of the settlement, Vanguard does not admit wrongdoing. According to an article in The Wall Street Journal, the Massachusetts secretary of the commonwealth, William Galvin, said that Vanguard “had a duty to warn their investors that they could have an increased tax liability” because of their actions and that “I don’t think it’s unfair to say that they were either cavalier or clueless”.
Do You Have Tax Liabilities From Vanguard Target Retirement Date Fund Selloff?
If you or someone you know has losses from a Vanguard target retirement date selloff, contact Silver Law Group for a no-cost confidential consultation at firstname.lastname@example.org or toll free at (800) 975-4345.
Managing Partner Scott Silver is the chairman of the Securities and Financial Fraud Group of the American Association of Justice and represents investors nationwide in securities and investment fraud cases. We take most cases on a contingency fee basis, meaning you don’t owe us anything unless and until we recover for you.