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Vanguard to pay millions to mutual fund investors hit with big tax bills

·2 min read

By Jonathan Stempel

NEW YORK, July 6 (Reuters) - Vanguard Group, the largest mutual fund company, on Wednesday reached a $6.25 million settlement to resolve regulatory charges it failed to warn many fund investors that they would face surprisingly big tax bills.

The settlement with Massachusetts Secretary of State William Galvin concerned Vanguard's popular target-date retirement funds, which contain mixes of stocks, bonds and cash that are designed to become less risky as investors age.

Galvin said problems arose after Vanguard in December 2020 reduced the minimum investments in lower-cost funds designed for institutional investors to $5 million from $100 million.

He said this caused a flood of outflows from higher-cost funds, forcing them to sell securities and generate capital gains on which ordinary investors with taxable accounts owed taxes.

In one instance, the Vanguard Target Retirement 2040 Fund threw off 15.1% of its net asset value as capital gains in 2021, up from just 0.4% a year earlier.

"These extraordinary capital gains were caused by Vanguard's conscious decision to benefit ultra-wealthy shareholders over Main Street investors," Galvin said in a statement.

Vanguard did not admit wrongdoing in agreeing to settle.

Its payout includes $5.5 million to reimburse Massachusetts investors holding more than 5,000 taxable accounts, plus $750,000 to the state. The Valley Forge, Pennsylvania-based company had $8.1 trillion of assets under management in March.

"We are glad to put this matter behind us and avoid the cost and distraction of a protracted process," Vanguard said in a statement. "We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals."

The accord was reported earlier by the Wall Street Journal.

Vanguard faces related class-action litigation in Philadelphia federal court brought on behalf of investors nationwide in its target-date funds. (Reporting by Jonathan Stempel in New York; Additional reporting by Ross Kerber in Boston Editing by Matthew Lewis)