Vanguard Hit with Class Action Lawsuit Over Target Date Retirement Funds
Vanguard Group, one of the largest investment management companies in the world, is facing a class action lawsuit concerning its Target Date Retirement Funds (TDFs). This legal action has drawn significant attention due to its implications for investors and the broader retirement planning landscape.
Background of the Lawsuit
The class action was initiated by a group of investors who allege that Vanguard has engaged in misleading practices regarding the performance and management of its TDFs. Target Date Funds are designed to automatically adjust their asset allocation based on the investor’s target retirement date, providing a convenient option for those planning for retirement. However, the plaintiffs claim that Vanguard’s TDFs have not performed as advertised, leading to subpar returns for investors.
The lawsuit asserts that Vanguard failed to adequately disclose risks associated with TDFs, including the potential for lower-than-expected returns. Additionally, it argues that the funds did not provide the diversification they promised, exposing investors to unnecessary risks.
Key Claims
The plaintiffs contend that:
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Misrepresentation of Performance: Vanguard allegedly misrepresented the performance of its TDFs, leading investors to believe they would achieve better financial outcomes.
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Excessive Fees: Some investors argue that the fees associated with the funds were not competitive and detracted from overall returns.
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Fiduciary Duty: The lawsuit claims that Vanguard breached its fiduciary duty to act in the best interests of its investors. By not transparently presenting the risks and fees, the company failed to uphold this responsibility.
- Failure to Adjust: The plaintiffs believe that Vanguard did not adequately adjust the asset allocation within its TDFs in response to changing market conditions, which may have negatively impacted investment outcomes.
Vanguard’s Response
In response to the lawsuit, Vanguard has publicly stated that they are committed to transparency and the best interests of their investors. They assert that their investment strategies are well-researched and tailored to meet the goals of their clients. Vanguard intends to vigorously defend against the allegations, asserting that the claims misinterpret the intentions and effectiveness of their funds.
Implications for Investors
The lawsuit has sparked a broader conversation about the reliability of target date funds as a retirement investment option. As an increasing number of individuals depend on these funds for their retirement planning, issues surrounding performance, fees, and fiduciary responsibilities are coming under scrutiny.
Financial advisors suggest that investors review their portfolios and consider the specific terms and conditions of their target date funds. Understanding fee structures and performance history is crucial for informed decision-making, especially in light of this lawsuit.
Conclusion
The class action lawsuit against Vanguard highlights the complexities and challenges surrounding investment in target date retirement funds. As this legal matter unfolds, it may prompt investors to reevaluate their asset management choices and demand greater transparency from fund providers.
For Vanguard and similar investment firms, the case serves as a reminder of the importance of maintaining trust and accountability in an increasingly competitive financial landscape. Investors and stakeholders will be watching closely as the situation develops, seeking clarity and resolution in the evolving world of retirement planning.
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Very through description of all aspects of this case. I was hit with over $100,000 in capital gains. Another aspect I don't see highlighted is, as a retiree, I also had to pay much higher Medicare premiums due to the resulting very high-income
level I sustained in 2021.
Well done Rob. A concise, articulate summary of what is going on – I'm subscribing. What is also interesting in retrospect at this point in time (9/2022) is that 2021 was not a bad time to reap gains, it is just that it was not voluntary on our part (I was a target date investor with a serious gain thrown my way). No offense to your profession, but I have seen a lot of class action suits and the maneuvering therein that are pretty slimy affairs on the plaintiff's part. This lawsuit, however, is an example of when class action lawsuits can help the little guys.
Hello Rob, What tool do you use to switch between your camera and computer screen? I see that you press your keyboard to do that but would appreciate it if you could share the tool you use to do that. Also, thank you for the great content.
F**k Vanguard, there stealing my money. Beware!!.
It looks like according to the news, there was a settlement in MA with Vanguard agreeing to pay out, but admitting no fault. It also looks like a similar suit has been filed in Philadelphia as well. I'm guessing that those that are affected do not have to file and will be contacted with a settlement if the other suit winds up going in the investors' favor as the one in MA did.
thank you for explaining this, I got burned good. Years ago I had extra funds to invest and thought it was a good option as I had maxed out my 401K etc. Agree, stabbed in the back by Vanguard
I have the Vanguard Target Retirement 2020 in my employer-provided 403b. As I understand this situation, this move by Vanguard–as bad as it appears–will have no tax impact on me. Withdrawals from that account when I make them (far off in the future, actually, although I am 67, I don't need it any time soon) will be taxed as ordinary income. What this does, for sure, is undermine my confidence in Vanguard. Thanks for the clear explanation!
Thank you very much for explaining the issue clearly to me. My husband and I have investment in the target date retirement account. We noticed the high capital gain from Vanguard Tax statement and we had to pay more taxes to IRS. We have no idea what caused it, and never heard from Vanguard. We have invested in Vanguard for decades as individual investors, but we have less confidence in Vanguard now. The company changed management a while ago, and we believe that also changed the direction of the company and its interest towards safe guarding small investors. Thanks again.
Is there any way to mitigate this tax spike? I'm new to this, but I take it section 1202 exclusion does NOT apply here? It's only for qualified small business stocks from what I read.
Well explained. Thank you. This explains the surprise in my taxes this year.
Thank you for the excellent video – a great approachable summary of what happened
Thanks Rob for explaining this. Great information for the average target date investor.
It happened to my mom. Owed $8000 taxes this year. Unprecedented.
Interestingly, I always want to receive more capital gains instead of dividends from vanguard ETFs, for capital gains is not taxed in my country. US Mutual funds is not available to non-US person, however.
So I was one of those that held VTIVX in a taxable account and was hit with $25k capital gains. Thank you for explaining so thoroughly. Question is – now that the damage is done, would you move to more traditional three fund portfolio or just leave it assuming low likelihood this will happen again?
Thanks for covering this Rob. My mother had just put her inheritance into one of these funds (taxable account) and got hit with a very significant tax bill.
I kept part of retirement assets in taxable because I thought I would be in a higher tax bracket in retirement. So now I would like to put everything in ETF's, but that becomes very complicated ( and a taxable event) . I think a "reasonable "solution would be for Vanguard to open comparable "Target date " ETF's , which would protect individual investors . Even better would be if shares could be legally converted from Mutual fund to ETF, but I do not think there is any legal way for them to do that in existing accounts. I would also like Vanguard to pay the increased future Medicare premiums that will result from higher income. Some individuals will have their social security taxed as well, not to mention the compounded assets that our heirs will never inherit.
I held Investor Vanguard Target Retirement Fund (TRF) shares in a taxable account and incurred the capital gains tax liability. I wrote a Complaint Letter to Vanguard and received a reply. In the reply, Vanguard admitted: "Vanguard believes a decent percentage of the redemptions were driven by the lowering of the Institutional TRFs minimum from $100 million to $5 million as investors moved from the Investor TRFs into the Institutional TRFs (the Institutional and Investor TRFs are two separate sets of funds and not share classes of the same funds)." Vanguard also stated that it merged the funds, noting: "The mergers of the Vanguard Institutional TRFs into the Investor TRFs realized additional cost savings and the merged TRFs will have an expense ratio of 0.08%."
I am part of the class. One thing I don't think was mentioned was that for my 2021 taxes I now owe the IRS a penalty for having underpaid taxes. If Vanguard had at least notified me of the issue, I could have prepaid the taxes and avoided throwing money away this way. But I discovered the issue when I received my tax forms and saw this abnormal distribution, which was after the Jan 15 estimated tax due date. They knew, and could have told me. Jack Bogle would not approve. Disappointed.
Sad that I now have to decide if Vanguard just doesn’t care about harming the small investor, or do they not have the financial acumen to foresee this unfortunate result of their business plan? Either way, probably not the safest place to keep our savings anymore.
The problem is not the investment—it’s the “wrapper” it comes in. A mutual fund by law I believe has to pass capital gains taxes to its holders. If this was an etf, this would not be the case because of the tax code. I love vanguard target date and lifestrategy funds-just not in a taxable account. In a Roth or 401k they are all you need if you want to keep it simple. Good luck to all
Had a meeting with my Vanguard advisor about a week ago. The topic of what happened with the Target Date funds came up. He mentioned that Vanguard may try to do something monetarily to make things right. This was before I had heard about the class action. Do you think Vanguard may try to short circuit the class action? Might be the best strategy and be good for public relations…..
I took a double tax hit from Vanguard's policy change. First, I have to pay over $7,000 in taxes on capital gains that I neither asked for, nor needed. But the real knife in the back is the fact that these unasked for capital gains pushed me well past the $80k income limit so I can't claim the $1,400 2021 Recovery Rebate Credit (stimulus money.) Without Vanguard's actions, I would've been well under the threshold.
I don’t think you can hold Vanguard responsible for the tax code.
Sue the government for even having CG taxes apply to this situation
Rob, great video. At 17:40 you talk about triggering capital gain taxes when the investor eventually sells the funds. That makes sense. However, my understanding is that the investors that got these tax bills were paying the capital gains taxes of the investors that left for the institutional fund. I thought that was the real travesty here, paying someone else's taxes. Is my understanding wrong? Thanks.
they only good thing about a target date fund is when you are starting off in your retirement portfolio. This way you can have your money increase slowly. Or just invest in all stock market once you get some add bonds or international.
Edit: I thought the people who own any Vanguar funds/etfs at vanguards are the shareholders! Than nothing would be confidential.
Thank you very much for this interesting analysis.
Harm was also done in Dec. 2021, Not just with taxes. Look at NAV for target funds plummeting graph due to sell off.
I have Vanguard TDG in my taxable account. Should I look into moving my money out even though it will trigger more taxes?
I was dumped 15k on my 2050 target date fund good thing it was in my Roth ira
Vanguard is screwed. By default I despise class action lawsuits, but here I am totally for it.
This confirms my idea of holding ETFs and not mutual funds.
The suit won't get past the Motion to Dismiss. Vanguard makes no promises about distributions or tax implications.
So glad that you are an attorney because this case is so interesting to me and otherwise I probably would not have known about it because I try to stay away from most news (including financial news)
I think this is one of your best videos. You explained this complex subject very well.
Great explanation. As you explained, it's just a timing difference. Taxes would be paid regardless, it's just that Vanguard accelerated the timing of when the tax is paid (with the exception on if it's inherited). The capital gains increased the tax basis in the account (which in turn lower the gain when sold in the future) and likely did nothing to the overall value of the account (once reinvested). I imagine a settlement could be made by calculating the present value of the tax deferral. For example, assume an investor had $100 capital gain and $15 tax today. Assume the investor would have sold the fund in 10 years (I imagine vanguard could get the average). The damage to the investor is he/she paid the $15 tax today rather than in 10 years. So the investor would be paid "interest" of paying the tax earlier than he/she normally would have paid it.
36k in taxes on 105k in capital gains is a 34.3% tax rate. The highest federal capital gain rate is 20%, plus 3.8% Medicare surcharge (section 1411) for a 23.8% rate. That would mean his state rate must be 10.5%. He must live in California. Maybe Vanguard should countersue and say he could have lived in Nevada to avoid this 10.5% tax. Haha
the good news is that it doesn't look like Vanguard was trying to scam their customers and the issue is based on a mistake of not factoring in all the downstream impacts. At the beginning of the video I was afraid that Vanguard was being sued doing things to generate more fees. I hope the tax blunder get's worked out by the retail fund investors and Vanguard – unnecessarily triggering taxes sucks