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Vanguard created big tax bills for target-date fund investors, lawsuit claims


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According to Monday’s lawsuit, Vanguard Group and its executives imposed large tax bills on some target-date fund investors, totaling hundreds of millions.

Three investors filed the lawsuit in Pennsylvania Federal Court claiming that an investment manager caused an “investor to trigger an”elephant stampede“Sale in its TDFs.

According to the suit, people who held the funds in a non-tax-advantaged brokerage account such as a 401k plan or an individual retirement account were subject to “enormous” tax bills for 2021.

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Vanguard and its executives, fund trustees, also violated investors’ legal obligations, according to the lawsuit.

The plaintiffs — Valerie M. Verduce, Catherine Day and Anthony Pollock — seek compensation for the alleged harm on behalf of a class of similarly situated investors nationwide.

Vanguard representatives declined to comment.

Location of assets and fees

Vanguard provides two types of target date mutual funds to both retail investors and those who are enrolled in 401 (k) plans.

TDFs funds are designed to become more conservative as the investors approach their retirement age.

It also involves “asset placement”, a principle of financial planning that allows certain investments to be located. better held in tax-advantaged accountsTo avoid unexpected tax bills

Vanguard Target Retirement Fund Suites both had the exact same investment strategy. Investors needed to invest at least $100,000,000 in order to gain access to the lowest-cost mutual funds prior December 2020. Vanguard was there. reduced the threshold to $5 million — fueling an exodus from the higher-cost version.

The lawsuit claims that Vanguard sold up to 15% of assets from higher-cost retail fund funds as a result of this money flight. According to the lawsuit, Vanguard had to liquidate fund assets in order to raise funds to redeem investors’ shares.

When a mutual fund makes a profit and sells assets, there is usually a distribution to its shareholders. Capital gains are subject to tax for investors who have funds in taxable accounts. However, the capital gains can be reinvested by those with tax-advantaged accounts, such as 401(k), individual retirement accounts, and other tax-advantaged ones.

According to the lawsuit, distributions were made for investors who invested in higher-cost funds at least 40 percent more than they received the previous year. They claim that the plaintiffs were subject to 2021 tax bills of approximately $9,000-$36,000.