Some investors will soon get their money back, the result of a major settlement between financial firm Vanguard and the Massachusetts Secretary of State. The $6.25 million settlement relates to allegations that the company failed to warn investors that they would face large tax bills.
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Vanguard settlement explained
Vanguard settled with the Massachusetts Secretary of State’s office last week, with a total of $6.25 million to be awarded to Bay State Vanguard customers who were not properly notified of high tax bills coming their way.
The clients in question were users of Vanguard’s target funds. These popular tools are designed as “set it and forget it” options for retirement plan participants. They invest in a mix of stocks, fixed income and cash holdings, starting aggressively and becoming more conservative as retirement approaches. Each TDF has a set retirement year – the nominal “target date” – set as a benchmark.
Massachusetts Secretary of State William Galvin says the issue began in 2020, when Vanguard lowered its minimum investment in institutional funds from $100 million to $5 million. In turn, there were massive outflows of high-cost capital, forcing divestments that resulted in capital gains tax, which individual investors had to pay.
“These extraordinary capital gains were driven by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over Main Street investors,” Galvin said in a statement.
How does depreciation work?
More than 5,000 taxable accounts will get the money back. A total of $5.5 million will go to these investors, while another $750,000 will go 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 that you are eligible for a payout.
The bottom line
Vanguard settled with Massachusetts over unexpectedly high taxes for retail investors in target-date mutual funds. They will pay $5.5 million back to over 5,000 accounts. Potential beneficiaries will be informed of their status by the state.
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