Vanguard To Pay Millions To Mutual Fund Investors Hit With Big Tax Bills

The settlement involved Vanguard's popular target-date retirement funds after they generated outsized capital gains.

By Jonathan Stempel

Vanguard Group, the largest mutual fund company, has reached a $6.25 million settlement to resolve regulatory charges it failed to warn many fund investors that they would face surprisingly big tax bills.

The mutual fund giant reached the settlement July 6 with Massachusetts Secretary of State William Galvin. It concerned Vanguard’s popular target-date retirement funds, which are designed to become less risky as investors age.

Galvin said problems arose after Vanguard in December 2020 reduced the minimum investments in lower-cost funds designed for institutional investors to $5 million from $100 million.

He said this caused a flood of outflows from higher-cost funds, forcing them to sell securities and generate capital gains on which ordinary investors with taxable accounts owed taxes.

In one instance, the Vanguard Target Retirement 2040 Fund threw off 15.1% of its net asset value as capital gains in 2021, up from just 0.4% a year earlier.

“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over Main Street investors,” Galvin said in a statement.

Vanguard did not admit wrongdoing in agreeing to settle.

Its payout includes $5.5 million to reimburse Massachusetts investors holding more than 5,000 taxable accounts, plus $750,000 to the state. The Valley Forge, Pa.-based company had $8.1 trillion of assets under management in March.

“We are glad to put this matter behind us and avoid the cost and distraction of a protracted process,” Vanguard said in a statement. “We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals.”

The Wall Street Journal earlier reported the agreement.

Vanguard faces related class-action litigation in Philadelphia federal court brought on behalf of investors nationwide in its target-date funds.

This article was provided by Reuters.


Latest news

Bluespring Wealth Partners Acquires Scottsdale, Ariz., firm

Led by husband and wife Kevin and Carrie Dick, KDI Wealth Management oversees $750M in client assets and is rated in the top 10 in state by Forbes.

Judge Halts Rule Capping Credit-Card Late Fees

A federal judge in Texas halted the Consumer Financial Protection Bureau's new rule capping credit card late fees at $8.

Inflation, Economic Uncertainty Upending Retirement Dreams for Many

Nationwide’s Advisor Authority survey finds many are taking non-traditional approaches to retirement, including moving in with their adult children.

Perigon Wealth Management Appoints Head of Advisor Success and Integration

Maria Daley has more than 30 years of experience leading business development and relationship management teams.

SEC Wants RIAs to Verify Customer Identities

The SEC and Treasury say the rule is needed because customers have used RIAs for illicit foreign financial activity in the United States.

Concerns About Insufficient Savings Keep Many Retirees Awake, Survey Finds

Among those in retirement, 32% fear they have too little savings, according to the Schroders 2024 US Retirement Survey.