Vanguard Settles Lawsuit for $40 Million

By Jonathan Stempel

(Reuters) – Vanguard Group, the largest U.S. manager of mutual fund assets, agreed to pay $40 million to settle a lawsuit claiming it imposed unexpectedly large tax bills on ordinary investors in its popular target-date retirement funds.

A preliminary settlement of the proposed class action was filed on Wednesday in Philadelphia federal court, pending judicial approval. Vanguard denied any wrongdoing.

Background of the Lawsuit

The lawsuit originated from Vanguard's decision in December 2020 to lower the minimum investment in lower-cost funds for institutional clients from $100 million to $5 million. Investors claimed this led to a “stampede” into lower-cost funds, forcing higher-cost retail funds to liquidate assets to meet redemptions. Consequently, investors not qualifying for the lower-cost funds were burdened with substantial capital gains in their taxable brokerage accounts.

For instance, the Vanguard Target Retirement 2040 Fund distributed an estimated 15.1% of its net asset value as capital gains in 2021, compared to only 0.4% in 2020.

Vanguard's target-date funds are designed to provide a mix of stocks, bonds, and cash that become less risky as investors age while also being tax-efficient.

Based in Valley Forge, Pennsylvania, the company managed $9.9 trillion in assets as of August 31.

“Vanguard is committed to supporting everyday investors and retirement savers and is happy to have reached an agreement that allows us to put this litigation behind us,” Vanguard stated.

In July 2022, Vanguard agreed to pay $6.25 million to settle similar claims from Massachusetts Secretary of State William Galvin.

Investor lawyers may request up to $13.33 million for fees, $985,000 for expenses, and $240,000 for the 12 named plaintiffs, leaving around $25.4 million for other investors. They described the $40 million recovery as an “excellent result,” especially given the best-case scenario for damages was $259.5 million.

The case is titled In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.