Dovel & Luner Sues Vanguard for Mismanaging Target Date Funds
March 14, 2022 — SANTA MONICA – The Dovel & Luner law firm on Monday filed a federal class action lawsuit against Vanguard trustees and other entities, on behalf of investors in Vanguard’s Target Retirement Funds. The suit alleges that Vanguard’s mismanagement of these funds led to “enormous tax bills (tens of thousands or even hundreds of thousands of dollars)” for investors who held the funds in taxable accounts.
The Complaint, filed in the United States District Court for the Eastern District of Pennsylvania, alleges that Vanguard violated its fiduciary duties (and other legal duties) by disregarding and harming its smaller, taxable investors.
“When target date funds sell assets, they are required by law to distribute any capital gains to shareholders. Investors who hold target date funds in tax advantaged accounts can simply reinvest these distributions, without incurring any tax liability. Most of Vanguard’s larger investors (like retirement plans) fall into this bucket,” the Complaint explains. However, according to the Complaint, “Vanguard also markets and sells its target date funds directly to smaller, ordinary investors who hold these funds in taxable accounts. These investors have to pay taxes on these distributions, even when they automatically reinvest them (which is what most do). For these investors, if there is a massive sell-off of assets in their target date fund, this results in massive tax bills.”
Target date funds don’t normally sell many assets, so tax bills on capital gains distributions are minimal. But the lawsuit claims that, “beginning in December of 2020, Vanguard itself caused an ‘elephant stampede’ sell off” from its Retail Target Retirement Funds. “Vanguard opened its Institutional Funds (which hold the same assets as the Retail Funds) to all retirement plans with at least $5M, so that retirement plans invested in the Retail Funds could sell their shares and move over to cheaper, but otherwise identical, Institutional Funds. And over the next few months (extending into 2021), this is what happened.”
According to the Complaint, “[t]o raise cash to redeem so many shares, the Retail Funds were forced to sell off as much as 15% of their assets (or even more). When these assets were sold, the Retail Funds recognized capital gains on the assets. The resulting capital gains distributions to investors were unprecedented (40 times previous levels).” As The Wall Street Journal summarized, Vanguard’s actions “benefited big clients” but “left little ones holding the bag.”
“The complaint explains how Vanguard needlessly hurt its smaller, taxable investors, so that it could favor its larger retirement plans,” said Jonas Jacobson of Dovel & Luner. “These injured investors deserve to be made whole.”
Dovel & Luner
SOURCE Dovel & Luner, LLP
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