Vanguard Group is being sued by three investors for alleged negligence and breach of fiduciary responsibility, claiming that changes to target date retirement funds caused “huge tax liabilities” for individual investors.
Their case, filed on behalf of consumers who invested in Vanguard’s target retirement funds, is demanding compensation for “hundreds of millions of dollars” in losses suffered by thousands of investors.
Vanguard’s representative declined to comment.
Vanguard Group, Inc. is a private investment firm based in
Vanguard provided this image.
For investors looking for a one-stop shop for retirement assets, target-date retirement funds are a popular low-cost savings instrument. The funds are made up of a mix of equities and bonds and are linked to a date in the future, such as 2035, when the investor plans to retire. As the fund gets closer to its target date, it shifts more assets to fixed-income investments rather than equities.
According to the Investment Company Institute, target date mutual funds had $1.8 trillion in assets as of June 30, 2021.
The investors’ complaint was filed in federal court in Philadelphia on March 14 in response to adjustments made by Vanguard in late 2020.
According to the lawsuit, the asset manager, which had $8.1 trillion in total assets under management as of Jan. 31, has two levels of target date funds, one for individual clients and retirement plans with less than $5 million and the other for institutional investors with more than $100 million. The strategy and investments were the same in both tiers, but institutional investors paid a reduced cost.
Vanguard dropped their institutional investment minimum to $5 million in December 2020.
According to the lawsuit, this adjustment caused a sell-off in retail target funds as smaller retirement plans sold assets in order to shift money into lower-cost institutional funds. According to the lawsuit, Vanguard’s retail funds liquidated up to 15% of their assets to raise cash to redeem shares, resulting in capital gains that were paid to the funds’ remaining investors as required by law.
“While this had no effect on retirement plans, it did leave taxable investors with a tax bill,” the lawsuit claims.
According to the lawsuit, individual fund participants received capital gains dividends that were at least 40 times larger than they had ever received before.
According to the lawsuit, Vanguard had alternative choices to avoid this outcome, including cutting retail fund costs for plans with at least $5 million invested or merging the two funds.
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Vanguard eventually did the latter, merging the funds in September 2021. According to the lawsuit, this had no tax implications for investors. “However, the damage had already been done at this point. Unnecessary capital gains distributions—and related taxes—had already been paid by taxable investors, which could not be reversed.”
According to their legal complaint, the three plaintiffs in the lawsuit—Valerie Verduce of Georgia, Catherine Day of Massachusetts, and Anthony Pollock of California—invested in Vanguard funds in taxable accounts. According to the lawsuit, the three plaintiffs received more than $240,000 in combined capital gains in 2021 and estimate that their combined tax payments will be more than $55,000.