By Jonathan Stempel
(Reuters) – Vanguard Group, the largest U.S. mutual fund manager, agreed to pay $40 million to settle a lawsuit alleging that ordinary investors in its popular late-date pension funds were stuck with surprisingly high tax bills.
A tentative settlement of the proposed class action was filed Wednesday in Philadelphia federal court and requires a judge’s approval. Vanguard denied wrongdoing.
The lawsuit stemmed from Vanguard’s decision in December 2020 to reduce the minimum investment in lower-cost funds intended for institutional clients from $100 million to $5 million.
Investors said this caused a rush to the cheaper funds, forced more expensive retail funds to sell assets to meet redemptions, and saddled investors who didn’t qualify for the cheaper funds with large capital gains in their taxable investment accounts. .
In one example, the Vanguard Target Retirement 2040 Fund is estimated to have thrown away 15.1% of its net asset value as capital gains in 2021, up from 0.4% in 2020.
Vanguard’s target-date funds contain a mix of stocks, bonds and cash that are designed to become less risky as investors age, and are also tax efficient.
The Valley Forge, Pennsylvania-based company had $9.9 trillion in assets under management as of August 31.
“Vanguard is committed to supporting everyday investors and retirement savers and is pleased to have reached an agreement that will allow us to put this lawsuit behind us,” Vanguard said in a statement.
In July 2022, Vanguard agreed to pay $6.25 million to resolve similar claims by Massachusetts Secretary of State William Galvin.
The investors’ lawyers can seek up to $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 recovery of $40 million was an “excellent outcome.”
The case concerns Vanguard Chester Funds Litigation, US District Court, Eastern District of Pennsylvania, No. 22-00955.
(Reporting by Jonathan Stempel in New York; Editing by Richard Chang)
