A federal judge on Monday rejected Vanguard Group’s $40 million settlement with investors who claimed the mutual fund giant imposed inflated tax bills in its popular target-date funds. The decision was made by U.S. District Judge John Murphy in Philadelphia.
Settlement Rejected by Judge
Judge Murphy stated that the proposed settlement, announced in November, “provides no value” to investors because Vanguard could have offset the $40 million from its earlier, larger settlement with the U.S. Securities and Exchange Commission (SEC).
The SEC settlement, which provided $135 million in remediation to investors, had already subtracted $40 million and $2.1 million for individual claims. Vanguard’s total payout to the SEC was $106.4 million, which included a $13.5 million civil fine.
Concerns Over Legal Fees
In a 25-page decision, Judge Murphy agreed with an objecting class member that approving the $40 million settlement would leave investors with less money after over $13 million was taken out for legal fees. This made the settlement “not fair, reasonable, and adequate.”
Vanguard’s Argument
Vanguard, however, argued that the objecting class member misunderstood the SEC accord and rejected the settlement based on his objection, which, according to Vanguard, would make it harder for companies to settle similar civil and regulatory actions simultaneously.
Background of the Case
Both settlements stemmed from Vanguard’s December 2020 decision to reduce the minimum investment in lower-cost target-date fund classes, which were initially meant for institutional clients, from $100 million to $5 million. Many investors who qualified for these funds moved from higher-cost retail fund classes, forcing the retail funds to sell assets to meet redemptions and passing taxable capital gains to the remaining investors.
About Vanguard and Target-Date Funds
The target-date funds are designed to become less risky as investors age and to be tax-efficient. Vanguard, based in Valley Forge, Pennsylvania, manages $10.4 trillion in assets as of January 31.