Introduction
A federal judge has rejected Vanguard Group’s proposed $40 million settlement related to claims of inflated tax bills affecting its target-date funds.Context
U.S. District Judge John Murphy in Philadelphia ruled that the settlement, announced in November, "provides no value" to investors. He noted that Vanguard's prior settlement with the U.S. Securities and Exchange Commission (SEC) could offset this amount. The SEC accord included $135 million in remediation for investors, but after deductions, Vanguard's payout amounted to $106.4 million, which included a $13.5 million civil fine.Developments
In his detailed decision, Murphy agreed with an objecting class member, asserting that the approval of the $40 million settlement would ultimately disadvantage investors. He pointed out that out of this amount, over $13 million would be allocated for attorneys' fees, leaving investors with less financial benefit.Murphy further emphasized that the SEC settlement would provide class members with the same benefits without the need to account for legal fees or extinguishing claims. He stated, "The named plaintiffs, their counsel, and Vanguard cannot deny the math."
Vanguard contended that the objecting class member, John Hughes, misinterpreted the SEC agreement and argued that rejecting the settlement based on his objection would complicate future civil and regulatory actions involving companies.
Both the SEC settlement and the current case originated from Vanguard's decision in December 2020 to lower the minimum investment in its lower-cost target-date fund classes from $100 million to $5 million. This change prompted many qualified investors to transition from higher-cost retail fund classes, forcing retail funds to liquidate assets to satisfy redemptions and resulting in taxable capital gains for remaining investors.
The target-date funds are designed to diversify investments across stocks, bonds, and cash, aiming to reduce risk as investors approach retirement. Additionally, these funds are structured to be tax-efficient.
Vanguard, headquartered in Valley Forge, Pennsylvania, managed $10.4 trillion in assets as of January 31.