Some investors will be getting a bit of money back soon, the result of a big settlement between financial firm Vanguard and the Massachusetts Secretary of State. The $6.25 million settlement has to do with allegations that the firm failed to warn investors they’d be facing large tax bills.
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Vanguard’s Settlement Explained
Vanguard settled with the Massachusetts’ Secretary of State’s office last week, with a total of $6.25 million being awarded to Bay State Vanguard clients who were not properly informed of high tax bills coming their way.
The clients in question were users of Vanguard’s target-date funds. These popular instruments are designed as “set it and forget it” options for retirement plan participants. They invest in a mix of equities, fixed income and cash holdings, starting out aggressive and becoming more conservative as retirement approaches. Each TDF has a set retirement year — the titular “target date” — set as a benchmark.
Massachusetts’ Secretary of State William Galvin says that the issue started in 2020, when Vanguard lowered minimum investments in institutional funds from $100 million to $5 million. In turn, there were huge outflows from high-cost funds, which forced selloffs that resulted in capital gains tax, which individual investors had to pay.
“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over Main Street investors,” Galvin said in a statement.
How Does the Payback Work?
More than 5,000 taxable accounts will be getting money back. A total of $5.5 million will be going to these investors, with another $750,000 going to the state.
If you are a Massachusetts resident who invested in a Vanguard TDF, you should be on the lookout for a notice from the state telling you that you are eligible for a payment.
The Bottom Line
Vanguard settled a suit with Massachusetts regarding unexpectedly high tax bills for retail investors in target-date funds. They will be paying $5.5 million back to more than 5,000 accounts. Potential beneficiaries will be notified of their status by the state.
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