By Jonathan Stempel
(Reuters) – Vanguard Group, the biggest U.S. manager of mutual fund assets, agreed to pay $40 million to settle a lawsuit claiming it stuck atypical investors in its popular target-date retirement funds with surprisingly large tax bills.
A preliminary settlement of the proposed class motion was filed on Wednesday in Philadelphia federal court, and requires a judge’s approval. Vanguard denied wrongdoing.
The lawsuit stemmed from Vanguard’s December 2020 decision to cut back the minimum investment in lower-cost funds meant for institutional clients to $5 million from $100 million.
Investors said this caused a “stampede” into the lower-cost funds, forced higher-cost retail funds to sell assets to satisfy redemptions, and saddled investors who didn’t qualify for the lower-cost funds with large capital gains of their taxable brokerage accounts.
In a single example, the Vanguard Goal Retirement 2040 Fund threw off an estimated 15.1% of its net asset value as capital gains in 2021, up from 0.4% in 2020.
Vanguard’s target-date funds contain mixes of stocks, bonds and money which are designed to turn out to be less dangerous as investors age, and likewise be tax-efficient.
The Valley Forge, Pennsylvania-based company had $9.9 trillion of assets under management as of Aug. 31.
“Vanguard is committed to supporting on a regular basis investors and retirement savers and is completely satisfied to have reached an agreement that permits us to place this litigation behind us,” Vanguard said in a press release.
In July 2022, Vanguard agreed to pay $6.25 million to resolve similar claims by Massachusetts Secretary of State William Galvin.
The investors’ lawyers may seek as much as $13.33 million for fees, $985,000 for expenses and $240,000 for the 12 named plaintiffs, leaving about $25.4 million for other investors.
The lawyers said the “best case” scenario for damages was $259.5 million, and the $40 million recovery was an “excellent result.”
The case is In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.
(Reporting by Jonathan Stempel in Latest York; Editing by Richard Chang)