Vanguard will pay out millions to mutual fund investors hit by hefty tax bills

NEW YORK, July 6 (Reuters) – Vanguard Group, the largest mutual fund company, reached a $6.25 million settlement on Wednesday to resolve regulatory charges, without warning many fund investors that they would face surprisingly high tax bills.

The settlement with Massachusetts Secretary of State William Galvin involved Vanguard’s popular target-date retirement funds, which contain mixes of stocks, bonds and cash designed to become less risky as investors age.

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

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

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

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

Vanguard has not admitted to any wrongdoing in agreeing to settle.

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

“We are happy 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 achieve their financial goals.”

The deal was reported earlier by The Wall Street Journal.

Vanguard is facing a related class action lawsuit in federal court in Philadelphia brought on behalf of investors nationwide in its target date funds.

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Reporting by Jonathan Stempel in New York; Additional reporting by Ross Kerber in Boston Editing by Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

Robert D. Coleman