Vanguard Settles $40 Million Tax Lawsuit

Vanguard Group has agreed to a $40 million settlement to resolve a class-action lawsuit alleging that its restructuring of target-date retirement funds led to unexpectedly high capital gains taxes for investors. The lawsuit, which is pending approval in a Philadelphia federal court, stems from Vanguard's 2020 decision to lower the minimum investment for institutional funds, resulting in a rush of investors into lower-cost options. This influx forced the sale of assets in higher-cost retail funds, leading to significant capital gains distributions that burdened many investors with large tax bills. For instance, the Vanguard Target Retirement 2040 Fund's capital gains distribution increased dramatically from 0.4% in 2020 to 15.1% in 2021. While Vanguard denies any wrongdoing, it has previously settled similar claims with Massachusetts regulators for $6.25 million. The settlement will provide approximately $25.4 million to impacted investors after legal fees and expenses are covered.