A pivotal lawsuit against Vanguard regarding its target-date funds is set to advance, as ruled by a federal judge. The litigation, initiated by a group of investors seeking to form a class action, was partly upheld by Judge John F. Murphy, allowing it to enter the discovery stage. This phase permits the investors' legal team to request documents and other evidence from Vanguard.
The lawsuit, filed in a Pennsylvania federal court in March 2022, alleges negligence and breach of fiduciary duty by Vanguard, the trust that includes the target-date funds, and the trust's trustees. These allegations stem from modifications to the target-date funds that reportedly resulted in tax burdens for certain investors. The plaintiffs are demanding financial compensation and other remedies.
Although a representative for the investors was not immediately available for comment, Vanguard has expressed its intent to vigorously defend against the remaining claims, despite a partial dismissal of the lawsuit. The firm's spokesperson noted their satisfaction with the partial dismissal and their readiness to contest the enduring allegations.
Vanguard, a leading asset management firm, offers target-date funds as a popular, cost-effective option for retirement savings. The company previously maintained two tiers of these funds: one for individual investors and small retirement plans, and another for institutional investors with substantial assets, who benefited from lower fees. Despite using identical strategies and investments, a policy change in December 2020 led to a significant shift.
Vanguard lowered the minimum investment for institutional investors to $5 million, triggering a sell-off in the retail funds as smaller plans moved assets to the more economical institutional funds. This reallocation resulted in capital gains distributions to remaining investors in the retail funds, unexpectedly burdening those with investments in taxable accounts with additional tax liabilities.
For instance, plaintiff Valerie Verduce, who invested in Vanguard's 2020 and 2030 retail funds within taxable accounts, received over $60,000 in capital gains distributions in 2021, leading to a tax liability exceeding $9,000. The plaintiffs argue that Vanguard had alternative options that wouldn't have incurred such tax implications.
Vanguard and the trustees sought to dismiss the lawsuit, contending that the investors had not convincingly demonstrated any fiduciary breach. They argued that the capital gains taxes would have been due eventually upon the sale of shares, and that the impact of the 2021 distributions on the plaintiffs' financial positions was speculative, contingent on future events.
Judge Murphy's ruling partially upheld the lawsuit, allowing claims of fiduciary breach against the trustees and Vanguard's executives based on the duty of care to proceed. However, he dismissed the breach of fiduciary claim against Vanguard, clarifying that while Vanguard advises the trust and its trustees on operations and fund management, it doesn't directly influence individual investment decisions of the investors. The judge stated that without evidence of overpowering influence on decisions, the plaintiffs couldn't establish a plausible claim of fiduciary or confidential relationship under Pennsylvania law.
