The Pennsylvania-based investment company Vanguard has reached a $106 million multi-state settlement following a lawsuit over undisclosed tax implications. The settlement emerged from a three-year investigation conducted by multiple states in conjunction with the U.S. Securities Exchange Commission (SEC). In 2020, Vanguard lowered the investment minimum for its Institutional Target Retirement Funds (TRFs) from $100 million to $5 million.
This change prompted numerous retirement plan investors to redeem their Investor TRF shares and purchase Institutional TRF shares. The mass redemptions forced Vanguard to sell highly appreciated assets in the Investor TRF, triggering significant capital gains taxes for retail investors who remained in the Investor TRF. The investigation revealed that Vanguard failed to disclose these potential capital gains and tax implications to its shareholders.
Vanguard’s undisclosed tax implications
As a result, investors had to pay higher than expected capital gains taxes on some retirement funds. Over 40 states, including Illinois, Indiana, Wisconsin, and Minnesota, are participating in the settlement.
In Illinois alone, approximately 9,000 investors were affected by the undisclosed tax consequences. Illinois Secretary of State Alexi Giannoulis emphasized the importance of protecting Main Street investors and holding companies accountable when they fail to adhere to securities laws. “The Secretary of State’s office is committed to protecting Main Street investors and ensuring that companies operating in Illinois adhere to securities laws and are held accountable when they fail to do so,” Giannoulias said.
The SEC will be responsible for managing remediation payments and notifying affected investors. While it is not immediately clear how much money individual investors could receive or when the funds will be distributed, the settlement aims to compensate those who were impacted by Vanguard’s failure to disclose the potential tax implications.
