Vanguard and a group of investors are close to settling their legal dispute over target-date funds, according to recent court filings.
In 2022, investors filed a class action lawsuit against Vanguard, claiming the firm made changes to its target-date retirement funds that left individual investors with unexpected, hefty tax bills.
This latest filing follows an announcement in September that both parties had entered private mediation.
"The parties are finalizing their settlement details and expect to execute the agreement, with plaintiffs moving for preliminary approval of the proposed class settlement within the next week," the two parties stated in a Nov. 1 filing in Philadelphia federal court. "A further status report will be filed by Nov. 8, 2024, if the agreement is not finalized or the preliminary approval motion is not filed."
A spokesperson for Vanguard declined to comment, and attorneys for the investors did not respond to repeated requests for comment.
Target-date funds, favored by retirement savers, are a mix of stocks and bonds that automatically rebalance as they approach the investor's retirement "target date." According to the Investment Company Institute, as of June, target-date mutual funds held total net assets of $1.9 trillion.
Vanguard’s legal trouble traces back to changes made in 2020 to these funds. At the time, Vanguard offered two pricing tiers for its target-date funds: an institutional tier for retirement plans with over $100 million in assets and a separate tier for individual investors and smaller plans. The institutional tier offered lower fees. In December 2020, Vanguard lowered the threshold for institutional tier eligibility to $5 million.
This adjustment encouraged smaller retirement plans to move into the cheaper institutional tier, which led the target-date funds to sell assets and realize capital gains, according to the lawsuit. The funds then passed these capital gains on to investors, causing significant tax bills for those holding target-date funds in taxable accounts.
The lawsuit argues that these tax consequences were avoidable and that Vanguard had alternative options, such as merging the two tiers, a move it ultimately made in September 2021.
Vanguard sought to have the lawsuit dismissed. While a federal judge dismissed some of the investors' claims in November 2023, the judge allowed others to proceed.
