A federal judge in Philadelphia has rejected Vanguard Group’s proposed $40 million settlement with investors who alleged that the mutual fund giant caused them to incur inflated tax bills through its target-date funds.
Judge John Murphy’s Decision: On Monday, U.S. District Judge John Murphy ruled that the $40 million settlement offered no additional value to investors. He noted that Vanguard had already agreed to a larger $135 million remediation under a separate settlement with the U.S. Securities and Exchange Commission (SEC) earlier this year.
Overlap with SEC Settlement: The SEC settlement, finalized in January, provided $135 million to investors but deducted $40 million (the amount in the rejected settlement) and $2.1 million allocated for individual claims. Vanguard’s total payment to the SEC was $106.4 million, which included a $13.5 million civil fine.
Legal Fees Concern: Judge Murphy highlighted that the proposed settlement would result in over $13 million being deducted for attorneys’ fees, leaving investors with less compensation than under the SEC agreement.
Fairness and Adequacy: The judge concluded the settlement was not “fair, reasonable, and adequate” because the SEC settlement already guaranteed investors the same benefits without attorneys’ fees or extinguishing claims.
The lawsuits arose from Vanguard’s December 2020 decision to lower the minimum investment threshold for its lower-cost target-date fund classes from $100 million to $5 million, allowing more institutional investors to participate.
This shift caused many investors to move from higher-cost retail fund classes to lower-cost institutional classes, forcing retail funds to sell assets to meet redemptions and triggering taxable capital gains for remaining investors.
Target-date funds are designed to balance stocks, bonds, and cash, gradually reducing risk as investors approach retirement age, with an emphasis on tax efficiency.
Vanguard argued that objections to the settlement, particularly from investor and attorney John Hughes, misunderstood the SEC agreement and warned that rejecting settlements like this could hinder companies’ ability to resolve parallel civil and regulatory claims efficiently.
The case, In re Vanguard Chester Funds Litigation, is pending in the U.S. District Court for the Eastern District of Pennsylvania (No. 22-00955).
As of January 31, 2025, Vanguard managed $10.4 trillion in assets and is headquartered in Valley Forge, Pennsylvania.
YOU MAY ALSO LIKE:
What Do I Need to Open a Vanguard Account
What Are the Best 10 Vanguard Mutual Funds
