Vanguard Hit With Class-Action Suit Over Target Date Fund Tax Bills

Vanguard, the suit states, "had other, readily-available ways to lower costs for retirement plans without hurting its taxable investors. But it either did not even consider these options, or did not care about hurting its smaller, taxable investors. This was a gross violation of Vanguard's fiduciary duties (among other legal duties)."

Vanguard, the lawsuit states, "competes to get the most assets under management, while maintaining low fees."

As one of the largest investment companies in the world, with over $8 trillion under management, and "the largest mutual fund provider," it is "engaged in an ongoing 'price war' with its competitors," the lawsuit continues.

Vanguard is also the largest TDF manager in the industry and the No. 1 "recipient of cash flowing into target-date funds," the lawsuit continues.

Because most of the money in Vanguard's target date funds "comes from company and institutional retirement plans," Vanguard "is therefore incentivized to keep the managers of its retirement plans happy," according to the complaint.

Before December 2020, "only retirement plans with $100M or more could access the Institutional Funds. Plans with under $100M were limited to the Retail Funds, with higher fees. Naturally, plans with under $100M wanted the lower fees available to the Institutional Fund investors," the lawsuit says.

Vanguard did not respond to a request for comment by press time.

William Galvin, Massachusetts' top securities regulator, launched an investigation in late January into the purchase of target date mutual funds by Massachusetts customers in taxable accounts at five broker-dealers — T. Rowe Price Investment Services, American Fund Distributors, BlackRock Investments, Fidelity Brokerage Services and Vanguard Marketing Corp.

Galvin said he was particularly concerned by reports of inadequately disclosed fund changes that shifted financial burdens to small-dollar investors, resulting in large tax bills for those who held the funds in non-retirement accounts.

The Massachusetts Securities Division "is looking at issues like those that recently happened with Vanguard," a spokesperson for Galvin's office told ThinkAdvisor then.