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Regulation and Compliance > State Regulation > Massachusetts

Vanguard to Pay $6.25M Over TDF Tax Bills in Massachusetts

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A Vanguard Group business has agreed to make restitution to thousands of Massachusetts investors who were hit with unexpectedly hefty tax bills last year under a settlement that state regulators announced Wednesday.

Massachusetts Secretary of the Commonwealth William F. Galvin, the state’s top securities regulator, announced that his office’s securities division has secured a $6.25 million settlement from Vanguard Marketing Corp. after an investigation into potential tax disclosure and marketing issues with target date funds.

Retail investors were disproportionately affected by these issues, which involved a capital gains distribution resulting from the firm’s reduction in investment minimums for certain TDFs, according to a press release from Galvin.

Vanguard agreed to establish a $5.5 million fund to make restitution payments to eligible Massachusetts residents for a portion of the tax liabilities they incurred and to make a one-time $500,000 payment to the state. The firm also agreed to pay an additional $250,000 to administer the fund, according to Galvin.

“I’m pleased that my office has been able to secure meaningful relief for Massachusetts investors,” Galvin said. “These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over main street investors.”

“Firms should be putting retail investors first when making management decisions, and Vanguard failed to do that in this case,” he said.

When Vanguard announced in December 2020 that it was reducing the investment minimum for its Institutional TDFs from $100 million to $5 million, it saw an exodus of accounts with more than $5 million from the lower-dollar Investor Vanguard TDFs to the Institutional TDFs, according to Galvin.

Investors with less than $5 million who held Investor TDFs in taxable accounts were left to pay the large capital gains tax bills that resulted from this shift, his office said. Long- and short-term capital gains were distributed to more than 5,000 Massachusetts accounts, Galvin’s office said.

“We are glad to put this matter behind us and avoid the cost and distraction of a protracted process,” Vanguard said in a statement Wednesday. “As a client-owned organization, Vanguard has a long history of lowering costs and investment minimums to benefit investors and retirement savers. We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals.”

The state’s Securities Division launched the investigation in January after a Wall Street Journal article on the issue. One investor told the newspaper that he had received an unexpected $150,000 tax bill on his TDF. Vanguard didn’t admit or deny wrongdoing in the agreement, the Journal reported Wednesday.

Galvin told the newspaper that claimants may seek up to 65% of the relevant tax liability in restitution from Vanguard.