A division of mutual fund giant Vanguard has agreed to pay $6.25 million in “restitution” to Massachusetts investors who regulators say were left with unexpectedly large tax bills.
“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over main street investors.”
William Galvin
Secretary of the Commonwealth William F. Galvin said the taxes came from the distribution of capital gains resulting mainly from the broker-dealer’s reduction in investment minimums for certain target-date funds (TDFs).
The agreement with Vanguard was reached after the Securities Division became aware of potential tax disclosure and marketing issues with TDFs, disproportionately impacting retail investors.
Under the agreement, Vanguard will establish a $5.5 million fund to make restitution payments to eligible Massachusetts claimants for a portion of the tax liabilities they incurred because of capital gains distributions related to the minimum investment changes made to Institutional Vanguard TDFs. Vanguard will pay an additional $250,000 to administer the fund.
In addition to the restitution fund, Vanguard will make a one-time payment of $500,000 to the Commonwealth of Massachusetts.
“I’m pleased that my office has been able to secure meaningful relief for Massachusetts investors,” Galvin said in a statement. “These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over main street investors.”
“Firms should be putting retail investors first when making management decisions, and Vanguard failed to do that in this case,” he added.
Galvin plans to directly reach out to potentially eligible investors to inform them that they may be entitled to financial restitution from Vanguard. Any funds remaining in the Massachusetts Vanguard TDF Fund after investors have received payments will be distributed to the Worker and Small Investor Protection Fund.
Vanguard marketed TDFs as a hands-off investment option for hard-earned retirement savings. However, when held in taxable accounts, management decisions such as reducing investment minimums can have drastic negative consequences for retail investors, Galvin claimed.
Vanguard’s announcement in December 2020 that it was reducing the investment minimum for its Institutional TDFs from $100 million to $5 million “caused an exodus of accounts with more than $5 million from the lower-dollar Investor Vanguard TDFs to the Institutional TDFs. The shift left those with less than $5 million who held Investor TDFs in taxable accounts to pay the large capital gains tax bills that resulted.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.