Valerie M. Verduce of Georgia invested in Vanguard’s 2020, 2030 and 2040 target date retail funds, all of which were taxable accounts. In 2021, her funds distributed more than $60,000 in capital gains, and she expected her resulting tax liability will be more than $9,000, the complaint said.
Catherine Day of Massachusetts was an investor in the 2025 and 2030 funds, also in taxable accounts. In 2021, those funds distributed more than $80,000 in capital gains, for which she expects to have a $12,000 tax liability, the complaint said.
And finally, Anthony Pollock of California invested in the 2025 and 2035 funds, also in taxable accounts. Last year, the funds distributed more than $105,000 in capital gains to him. He estimates his tax liability will be more than $36,000 the filing said.
According to the complaint, the plaintiffs seek (for themselves and on behalf of the class) an order certifying the claims or issues raised as a class action, a favorable judgement, damages, an injunction preventing Vanguard from further similar actions that trigger sell-offs in the target date funds, restitution, disgorgement with pre- and post-judgement interest, and attorneys’ fees.
“The harm to taxable investors from the sell-off was not some hidden risk that would require care to discover; the harm was foreseeable, obvious, and known to Defendants. It was simply a matter of looking at how many plans had more than $5M invested, calculating the likely outflow, remembering that taxable investors exist, and considering the tax consequences for them,” the complaint said. “Defendants had alternative, readily-available paths to accomplish their desired result without harming taxable investors. For one, Defendants could have lowered fees in the Retail Funds, for plans with over $5M. Alternatively, they could have chosen to merge the Retail and Institutional Funds.”
Furthermore, the complaint said, Vanguard in September 2021, less than a year after it lowered the threshold for investment in the institutional funds, did indeed merge the retail and institutional funds together.
“At this point, however, the harm was done. Taxable investors had already incurred unnecessary capital gains distributions—and corresponding taxes—that could not be erased,” the complaint said. “Defendants could have made the decision to merge the Retail and Institutional Funds in December 2020. Had they chosen to do so at that time, none of smaller, taxable investors would have incurred the large capital gains tax liabilities arising from the massive selloff in the Retail Funds.”