[Vanguard sued over taxable distributions in Target Date Funds]

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Parkinglotracer
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Vanguard lawsuit

Post by Parkinglotracer »

[Thread merged into here --admin LadyGeek]

https://www.bloomberg.com/news/articles ... y-re-suing


Article in Bloomberg news about investors suing vanguard for surprise tax bills - maybe of interest to those who were effected
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by LadyGeek »

I merged Parkinglotracer's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)
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xpy1999
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Target fund lawsuit against Vanguard

Post by xpy1999 »

[merged into existing thread - moderator prudent]

https://www.bloomberg.com/news/articles ... y-re-suing

Not sure about the chance of this lawsuit, but it is happening.
HENRYGRUGER
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by HENRYGRUGER »

To see a common sense review of the FACTS...check out Bob Berger's video.

https://www.youtube.com/watch?v=ExB6K1SabBU
JKPS
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Vanguard's Tax surprise in 2021

Post by JKPS »

[This thread merged into the existing thread on the topic - Moderator Misenplace]

Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds. But although I have no such funds in my taxable account (only index funds like balanced, international stocks etc.), I also noticed something unusual: "Personal Investment Return" = Capital Gain + Income Return DOWN by 20% from 2020 to 2021. Yet, 1099 Income reported by Vanguard to IRS: 40% more Dividends in 2021 compared to 2020, and 160% more Capital Gains in 2021 compared to 2020! I asked my flagship advisor, and she had no clue as to why. Said that I should explore more "tax efficient" funds. I haven't dug deeper, but could it be the same reason as for the funds under class action lawsuit? NY Times also said that: "Vanguard's long-term capital gain distributions in 2021 averaged 12.1 percent, compared with less than 1 percent in recent years." What gives?
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anon_investor
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Re: Vanguard's Tax surprise in 2021

Post by anon_investor »

JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds. But although I have no such funds in my taxable account (only index funds like balanced, international stocks etc.), I also noticed something unusual: "Personal Investment Return" = Capital Gain + Income Return DOWN by 20% from 2020 to 2021. Yet, 1099 Income reported by Vanguard to IRS: 40% more Dividends in 2021 compared to 2020, and 160% more Capital Gains in 2021 compared to 2020! I asked my flagship advisor, and she had no clue as to why. Said that I should explore more "tax efficient" funds. I haven't dug deeper, but could it be the same reason as for the funds under class action lawsuit? NY Times also said that: "Vanguard's long-term capital gain distributions in 2021 averaged 12.1 percent, compared with less than 1 percent in recent years." What gives?
Which Vanguard funds do you hold? None of my Vanguard equity index mutual funds had any capital gain distributions in 2021.
mamster
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Re: Vanguard's Tax surprise in 2021

Post by mamster »

You mentioned the "balanced fund." Is that VBIAX (Vanguard Balanced Index Fund, Admiral Shares)?

That fund did distribute capital gains in 2021, but not nearly as much as the target-date funds:

Vanguard 2021 year-end distributions
sycamore
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Re: Vanguard's Tax surprise in 2021

Post by sycamore »

JKPS wrote: Tue May 24, 2022 5:29 pm I haven't dug deeper, but could it be the same reason as for the funds under class action lawsuit?
I don't think so. The lawsuit I believe is limited to the Target Retirement (Investor share) funds. The underlying cause of the TR fiasco (large redemptions of the Investor funds due to 401k plans switching to the lower ER Institutional funds) didn't happen in other such Vanguard funds.

Would you be willing to share the names of the funds you owned in 2021? Otherwise we can only speculate about what happened for you.
JKPS wrote: Tue May 24, 2022 5:29 pm I also noticed something unusual: "Personal Investment Return" = Capital Gain + Income Return DOWN by 20% from 2020 to 2021
Could you explain where you're seeing this info? Is it from somewhere on the Vanguard web site? Which web page? Or was it something in your December 2021 statement? With a bit more info, we might be able to reconcile the discrepancy between that message and what you're seeing on the 1099s.

My wild guess is that "Personal Investment Return" refers to all your accounts including IRAs, whereas your 1099 is only for taxable accounts.
JKPS wrote: Tue May 24, 2022 5:29 pm NY Times also said that: "Vanguard's long-term capital gain distributions in 2021 averaged 12.1 percent, compared with less than 1 percent in recent years." What gives?
2021 was a good year for the stock market. Vanguard's actively managed funds (and balanced funds including LifeStrategy that use index funds) distributed capital gains. That could explain the larger increase after excluding the Target Retirement fiasco impact.

Does that explain what the NY Times is talking about? Beats me, I didn't read their article. Presumably NYT did the right thing and provided enough information for a reader to understand what their numbers mean, e.g., which subset of Vanguard funds did use as for the data set; how did the compute the average - simple averaging, asset-weighted, or what?; etc. If you can provide that information, we might be able to explain "what gives" more accurately.
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Re: Vanguard's Tax surprise in 2021

Post by rkhusky »

JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
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Re: Vanguard's Tax surprise in 2021

Post by ruralavalon »

rkhusky wrote: Wed May 25, 2022 8:24 am
JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
That is a good summary of the target date tax problem, thank you you for the link.
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billaster
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Re: Vanguard's Tax surprise in 2021

Post by billaster »

ruralavalon wrote: Wed May 25, 2022 8:45 am
rkhusky wrote: Wed May 25, 2022 8:24 am
JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
That is a good summary of the target date tax problem, thank you you for the link.
What the Morningstar article fails to point out is that the capital gains stampede was entirely avoidable by Vanguard. Vanguard managers chose to ignore the harm they were doing to small retail investors in their eagerness to cater to large institutional clients. Many suffered thousands of dollars of unnecessary taxes.
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Re: Vanguard's Tax surprise in 2021

Post by BernardShakey »

rkhusky wrote: Wed May 25, 2022 8:24 am
JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
Not really that "even-handed" ---- Morningstar should have pointed out that this was avoidable and that Vanguard should have been on top of this and protected their mom and pop retail investors.
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exodusNH
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Re: Vanguard's Tax surprise in 2021

Post by exodusNH »

billaster wrote: Wed May 25, 2022 10:28 am
ruralavalon wrote: Wed May 25, 2022 8:45 am
rkhusky wrote: Wed May 25, 2022 8:24 am
JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
That is a good summary of the target date tax problem, thank you you for the link.
What the Morningstar article fails to point out is that the capital gains stampede was entirely avoidable by Vanguard. Vanguard managers chose to ignore the harm they were doing to small retail investors in their eagerness to cater to large institutional clients. Many suffered thousands of dollars of unnecessary taxes.
Eh. As the article shows, 3 other fund families had average gains between 50-80% of Vanguard's.

And unless people intended to die holding these funds, the taxes were just paid earlier than expected. It would be interesting, 20 years from now, to evaluate the actual effect of paying 15% capital gains now vs whatever the future rate will be. Those reinvested dividends had pretty high prices and probably offer a good TLH opportunity now.

It would have been interesting to calculate what the gains would have been without the shift in institutional investors. Given how well the market had down, there would have been gains from the internal rebalancing anyway. (As those other fund families show.)
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Re: Vanguard's Tax surprise in 2021

Post by ruralavalon »

billaster wrote: Wed May 25, 2022 10:28 am
ruralavalon wrote: Wed May 25, 2022 8:45 am
rkhusky wrote: Wed May 25, 2022 8:24 am
JKPS wrote: Tue May 24, 2022 5:29 pm Many articles reporting that Vanguard investors got a huge taxable capital gain surprise in 2021 because they merged the retail and institutional funds the wrong way - by selling retail funds and buying institutional - triggering gains. But they only refer to the Target Retirement funds.
That's not correct. Vanguard lowered the threshold for companies to use the Institutional TR funds. Many companies chose to take advantage of the cost savings for their employees and moved from Investor class TR funds to Institutional TR funds. That switch plus the large gains in the stock market in 2021 caused large cap gains for many of the Investor TR funds. This was an issue for the 1% of TR investors who hold the funds in a taxable account.

This article is fairly even-handed:
https://www.morningstar.com/articles/10 ... s-surprise
That is a good summary of the target date tax problem, thank you you for the link.
What the Morningstar article fails to point out is that the capital gains stampede was entirely avoidable by Vanguard. Vanguard managers chose to ignore the harm they were doing to small retail investors in their eagerness to cater to large institutional clients. Many suffered thousands of dollars of unnecessary taxes.
But the harm was to a very few large individual investors, not to "small retail investors".
Morningstar wrote:Vanguard reports 99% of its target-date series shareholders own it in a tax-deferred account. For those shareholders, capital gains distributions are nonevents.

Only investors fortunate enough to max out annual contributions to 401(k)s ($20,500, or $27,000 for those over 50, in 2022) and IRAs ($6,000, or $7,000 for over 50) and still have significant additional assets to invest face potentially painful tax bills. That’s not a luxury most investors have. Indeed, the median 401(k) balance was $34,000 at the end of 2020, according to a Vanguard study. With that in mind, it’s mostly larger individual investors who need to beware capital gains from target-date funds, not smaller investors, despite what some media reports may have suggested.
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billaster
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Re: Vanguard's Tax surprise in 2021

Post by billaster »

Nice to know that some folks think it is okay if Vanguard throws 1% of their small retail investors under the bus to cater to large institutional investors. How many is that --- hundreds -- thousands? Remember that the first rule of fiduciary duty is "first do no harm."

As I pointed out, I helped an elderly neighbor with her tax return and she was shocked to find that she had thousands in unexpected extra taxes. She also got bumped up into the 85% tax bracket for Social Security and will be paying Medicare IRMAA premiums. She's never going to get that money back.

She worked hard her entire life without having access to those generous 401(k) plans folks talk about. She had a modest taxable retirement account.

And never forget the bottom line. All of this was totally avoidable. Vanguard could have just lowered the fee rate on both funds, institutional and retail and nobody would have had reason to stampede from one to the other. And that is exactly what Vanguard did after the damage was already done, proving that that the harm they did was avoidable.

Stupidity, depraved indifference, greed? Who knows, but maybe we will find out if the case goes to trial.
exodusNH
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Re: Vanguard's Tax surprise in 2021

Post by exodusNH »

billaster wrote: Wed May 25, 2022 12:21 pm Nice to know that some folks think it is okay if Vanguard throws 1% of their small retail investors under the bus to cater to large institutional investors. How many is that --- thousands? Remember that the first rule of fiduciary duty is "first do no harm."

As I pointed out, I helped an elderly neighbor with her tax return and she was shocked to find that she had thousands in unexpected extra taxes. She also got bumped up into the 85% tax bracket for Social Security and will be paying Medicare IRMAA premiums. She's never going to get that money back.

She worked hard her entire life without having access to those generous 401(k) plans folks talk about. She had a modest taxable retirement account.

And never forget the bottom line. All of this was totally avoidable. Vanguard could have just lowered the fee rate on both funds, institutional and retail and nobody would have had reason to stampede from one to the other. And that is exactly what Vanguard did after the damage was already done, proving that that the harm they did was avoidable.

Stupidity, depraved indifference, greed? Who knows, but maybe we will find out if the case goes to trial.
But 99%+ benefited. The ~1% that didn't were holding a fund that is not designed to be tax efficient in a taxable account. The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run. Again, three other fund families also had distributions that were 50-80% of Vanguard's.

It's certainly unfortunate for your friend. But it seems like she would probably have seen half of that amount anyway.

This has been thoroughly discussed in another thread here, including a lot of commentary from people on the accounting and compliance side of mutual funds.
billaster
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Re: Vanguard's Tax surprise in 2021

Post by billaster »

exodusNH wrote: Wed May 25, 2022 12:46 pm But 99%+ benefited. The ~1% that didn't were holding a fund that is not designed to be tax efficient in a taxable account. The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run. Again, three other fund families also had distributions that were 50-80% of Vanguard's.

It's certainly unfortunate for your friend. But it seems like she would probably have seen half of that amount anyway.

This has been thoroughly discussed in another thread here, including a lot of commentary from people on the accounting and compliance side of mutual funds.
That's total wrong. 99% did not benefit. Just a set of institutional investors benefited. Retail investors were either directly harmed or benefited not at all.

And that really doesn't matter. The fiduciary standard is not what's best for some. The fiduciary standard is "first do no harm." It's not okay for a fiduciary to make decisions benefiting one beneficiary while causing harm to another.

Keep in mind, that none of this harm was necessary. They could have just lowered fees for both funds from the beginning -- which is what they did eventually anyway.
The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run.
That's also incorrect. This stampede to the exits had nothing whatsoever to do with rebalancing. This was a stampede deliberately engineered by the salespeople at Vanguard. This was a capital gains distribution at least 40 times the size of any distribution in recent history and totally unexpected because it wasn't caused by rebalancing.

This fiasco is nothing particular about Target Retirement Funds. It's true of any equity fund in a taxable account. Vanguard could have done the same to the Total Stock Market Fund. Would you be okay with that?

It was totally unnecessary. So we have to find out whether it was stupidity or depraved indifference or greed behind this boneheaded move.
exodusNH
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Re: Vanguard's Tax surprise in 2021

Post by exodusNH »

billaster wrote: Wed May 25, 2022 1:27 pm
exodusNH wrote: Wed May 25, 2022 12:46 pm But 99%+ benefited. The ~1% that didn't were holding a fund that is not designed to be tax efficient in a taxable account. The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run. Again, three other fund families also had distributions that were 50-80% of Vanguard's.

It's certainly unfortunate for your friend. But it seems like she would probably have seen half of that amount anyway.

This has been thoroughly discussed in another thread here, including a lot of commentary from people on the accounting and compliance side of mutual funds.
That's total wrong. 99% did not benefit. Just a set of institutional investors benefited. Retail investors were either directly harmed or benefited not at all.

And that really doesn't matter. The fiduciary standard is not what's best for some. The fiduciary standard is "first do no harm." It's not okay for a fiduciary to make decisions benefiting one beneficiary while causing harm to another.

Keep in mind, that none of this harm was necessary. They could have just lowered fees for both funds from the beginning -- which is what they did eventually anyway.
The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run.
That's also incorrect. This stampede to the exits had nothing whatsoever to do with rebalancing. This was a stampede deliberately engineered by the salespeople at Vanguard. This was a capital gains distribution at least 40 times the size of any distribution in recent history and totally unexpected because it wasn't caused by rebalancing.

This fiasco is nothing particular about Target Retirement Funds. It's true of any equity fund in a taxable account. Vanguard could have done the same to the Total Stock Market Fund. Would you be okay with that?

It was totally unnecessary. So we have to find out whether it was stupidity or depraved indifference or greed behind this boneheaded move.
Every person with a 401k that qualified for the lower rate benefited. It wasn't some faceless cadre of "institutions". You personally don't need to have $5M to qualify for the lower rate. When you hear "Institutional", it's because it's the 401k administrators / custodians. But the people that benefited are the individuals with modest balances. The median 401k balance at retirement is less than $85,000. Those are the people who were helped.

E.g., I can invest in Vanguard's Wellesley Admiral shares even though the minimum is $50,000. We've got 100 participants and a total balance of around $5M, but the fund was available when we were half that size.

If you read that other thread -- and you should, as it's exhaustive -- you'll see that the move wasn't due some "Vanguard salespeople". It was to stem the outflows to providers like Fidelity and Schwab, who offered funds with lower fees. Those funds were going to leave anyway, which would have left your friend in the same position.

Paying taxes in a taxable account is always a risk. It's not Vanguard's purview to take my taxes into consideration. Again, if you read the other thread, they likely would have run afoul of regulations had they tried to counsel people on the topic of taxes.

At any rate, neither of us is going to convince the other. Here's a link to that thread, viewtopic.php?t=372847&sid=eb0e32b14d62 ... a5569eb970, where all of this has already been extensively argued.
sycamore
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Re: Vanguard's Tax surprise in 2021

Post by sycamore »

It's good that Bogleheads has ongoing & prominent discussion of the potential harm of using Target Date/Target Retirement funds in a taxable account. They come with tradeoffs, and are appropriate for some investors in some circumstances, but clearly a bad choice in others. For example, in the past I've used them in my taxable account but with no harm because I was in the 0% capital gain tax bracket. But then there's your friend's situation.
billaster wrote: Wed May 25, 2022 1:27 pm
exodusNH wrote: Wed May 25, 2022 12:46 pm But 99%+ benefited. The ~1% that didn't were holding a fund that is not designed to be tax efficient in a taxable account. The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run. Again, three other fund families also had distributions that were 50-80% of Vanguard's.

It's certainly unfortunate for your friend. But it seems like she would probably have seen half of that amount anyway.

This has been thoroughly discussed in another thread here, including a lot of commentary from people on the accounting and compliance side of mutual funds.
That's total wrong. 99% did not benefit. Just a set of institutional investors benefited. Retail investors were either directly harmed or benefited not at all.
"Total wrong" is wrong. :) Who were the institutional investors that benefited? The millions and millions of 401k plan participants who got the benefit of a lower ER.
billaster wrote: Wed May 25, 2022 1:27 pm And that really doesn't matter. The fiduciary standard is not what's best for some. The fiduciary standard is "first do no harm." It's not okay for a fiduciary to make decisions benefiting one beneficiary while causing harm to another.
Maybe I'm mistaken, but Vanguard as a fund provider or as a brokerage does not act as a fiduciary or tax advisor. The investor is making the investing decisions. Maybe something like Vanguard's PAS service includes a fiduciary obligation?

In any case, a logical consequence of what you're arguing is that if one person or one group might suffer harm from a decision, then the decision can't be made even if it helps 99% of people. Understandably, it would be wonderful if any decision taken must help everyone involved. I would say that'd be great in an ideal world but we don't live in that world.
billaster wrote: Wed May 25, 2022 1:27 pm Keep in mind, that none of this harm was necessary. They could have just lowered fees for both funds from the beginning -- which is what they did eventually anyway.
The rebalancing activity, which the fund is always doing, always has this risk, especially after a fantastic stock run.
That's also incorrect. This stampede to the exits had nothing whatsoever to do with rebalancing. This was a stampede deliberately engineered by the salespeople at Vanguard. This was a capital gains distribution at least 40 times the size of any distribution in recent history and totally unexpected because it wasn't caused by rebalancing.

This fiasco is nothing particular about Target Retirement Funds. It's true of any equity fund in a taxable account. Vanguard could have done the same to the Total Stock Market Fund. Would you be okay with that?

It was totally unnecessary. So we have to find out whether it was stupidity or depraved indifference or greed behind this boneheaded move.
It sure seems like it could've been avoided, although I'm not privy to the exact timing of events as they unfolded. What happened could be explained (not to say excused) by Vanguard's choice to focus on the larger number of retirement plan participants than taxable account investors. Maybe the lawsuit will reveal the details. Stay tuned.
sycamore
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Re: Vanguard's Tax surprise in 2021

Post by sycamore »

JKPS, not too surprising but this thread has gone down the same path as others relating to the 2021 Target Retirement fiasco. :oops:

Going back to your OP
JKPS wrote: Tue May 24, 2022 5:29 pm ...
I haven't dug deeper, but could it be the same reason as for the funds under class action lawsuit? NY Times also said that: "Vanguard's long-term capital gain distributions in 2021 averaged 12.1 percent, compared with less than 1 percent in recent years." What gives?
as mentioned earlier, we can give more specific answers to your questions if we knew which funds you actually owned.
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Re: Vanguard's Tax surprise in 2021

Post by rkhusky »

billaster wrote: Wed May 25, 2022 12:21 pm Nice to know that some folks think it is okay if Vanguard throws 1% of their small retail investors under the bus to cater to large institutional investors.
That's a mis-characterization. Vanguard lowered the threshold for companies with plans in the range of $5M - $100M. $5M would be 50 employees with $100K in the plan. $100M would be 1000 employees with $100K in the plan. That range would be small companies up to perhaps mid-sized companies.
rkhusky
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Re: Vanguard's Tax surprise in 2021

Post by rkhusky »

BernardShakey wrote: Wed May 25, 2022 10:41 am Not really that "even-handed" ---- Morningstar should have pointed out that this was avoidable and that Vanguard should have been on top of this and protected their mom and pop retail investors.
You mean that Vanguard could have prevented 401k plans from moving to Fidelity or Schwab, who were or about to offer lower fees and minimums?

Or that Vanguard should have known in late 2020 that the stock market was going to shoot up in 2021?

Or that Vanguard should have known that companies would move their 401k's from Investor class to Institutional class once the minimums were dropped and should not have offered the lower minimums in order to keep the small company 401k's in the Investor class funds?
exodusNH
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Re: Vanguard's Tax surprise in 2021

Post by exodusNH »

rkhusky wrote: Wed May 25, 2022 3:34 pm
BernardShakey wrote: Wed May 25, 2022 10:41 am Not really that "even-handed" ---- Morningstar should have pointed out that this was avoidable and that Vanguard should have been on top of this and protected their mom and pop retail investors.
You mean that Vanguard could have prevented 401k plans from moving to Fidelity or Schwab, who were or about to offer lower fees and minimums?

Or that Vanguard should have known in late 2020 that the stock market was going to shoot up in 2021?

Or that Vanguard should have known that companies would move their 401k's from Investor class to Institutional class once the minimums were dropped and should not have offered the lower minimums in order to keep the small company 401k's in the Investor class funds?
I think people are getting tripped up on "institutional investors" and don't realize that includes all the $25,000 401ks owned by their neighbors.
billaster
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Re: Vanguard's Tax surprise in 2021

Post by billaster »

rkhusky wrote: Wed May 25, 2022 3:34 pm
BernardShakey wrote: Wed May 25, 2022 10:41 am Not really that "even-handed" ---- Morningstar should have pointed out that this was avoidable and that Vanguard should have been on top of this and protected their mom and pop retail investors.
You mean that Vanguard could have prevented 401k plans from moving to Fidelity or Schwab, who were or about to offer lower fees and minimums?

Or that Vanguard should have known in late 2020 that the stock market was going to shoot up in 2021?

Or that Vanguard should have known that companies would move their 401k's from Investor class to Institutional class once the minimums were dropped and should not have offered the lower minimums in order to keep the small company 401k's in the Investor class funds?
Vanguard could have accomplished all of this by simply reducing fees for the all investors in both funds. Then no one would have had any incentive to move from one to the other.

And in fact this is exactly what Vanguard did -- after they had already done the damage to small retail investors.

If Vanguard was doing this for the benefit of small investors, why didn't they do for everyone from the beginning? Stupidity, indifference or greed. Perhaps we will find out at trial.
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Re: Vanguard's Tax surprise in 2021

Post by BernardShakey »

billaster wrote: Wed May 25, 2022 4:26 pm
rkhusky wrote: Wed May 25, 2022 3:34 pm
BernardShakey wrote: Wed May 25, 2022 10:41 am Not really that "even-handed" ---- Morningstar should have pointed out that this was avoidable and that Vanguard should have been on top of this and protected their mom and pop retail investors.
You mean that Vanguard could have prevented 401k plans from moving to Fidelity or Schwab, who were or about to offer lower fees and minimums?

Or that Vanguard should have known in late 2020 that the stock market was going to shoot up in 2021?

Or that Vanguard should have known that companies would move their 401k's from Investor class to Institutional class once the minimums were dropped and should not have offered the lower minimums in order to keep the small company 401k's in the Investor class funds?
Vanguard could have accomplished all of this by simply reducing fees for the all investors in both funds. Then no one would have had any incentive to move from one to the other.

And in fact this is exactly what Vanguard did -- after they had already done the damage to small retail investors.

If Vanguard was doing this for the benefit of small investors, why didn't they do for everyone from the beginning? Stupidity, indifference or greed. Perhaps we will find out at trial.
+1. Shame on Vanguard.
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by RRA »

Did this just occur with Target Date Funds? Were Life Strategy funds affected too?
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by VTI »

Is it safe to hold Vanguard ETFs in taxable accounts?

I listened to Rick Ferri’s excellent interview with Eduardo Repetto, head of Avantis.

Eduardo explained that Avantis won’t use Vanguard’s strategy of attaching their ETFs to mutual funds because that would harm ETF investors. They be exposed to the behavior of the investors in the mutual fund, and would potentially suffer higher trading costs and increased tax liabilities.

Some in this thread have defended Vanguard’s target fund debacle by explaining that their management structure left them no other option but to harm retail investors. If this is true, then clearly, one should clearly be cautious about holding any Vanguard mutual fund in a taxable account.

But Vanguard attaches ETFs to their mutual funds—thus, ETF holders should be at risk too.

When available, should retail investors prefer non-Vanguard
ETFs for our taxable accounts?
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by grabiner »

VTI wrote: Wed May 25, 2022 7:10 pm Is it safe to hold Vanguard ETFs in taxable accounts?

I listened to Rick Ferri’s excellent interview with Eduardo Repetto, head of Avantis.

Eduardo explained that Avantis won’t use Vanguard’s strategy of attaching their ETFs to mutual funds because that would harm ETF investors. They be exposed to the behavior of the investors in the mutual fund, and would potentially suffer higher trading costs and increased tax liabilities.

Some in this thread have defended Vanguard’s target fund debacle by explaining that their management structure left them no other option but to harm retail investors. If this is true, then clearly, one should clearly be cautious about holding any Vanguard mutual fund in a taxable account.

But Vanguard attaches ETFs to their mutual funds—thus, ETF holders should be at risk too.

When available, should retail investors prefer non-Vanguard
ETFs for our taxable accounts?
In theory, Vanguard mutual funds with ETF classes should dilute the tax advantage of the ETF.

In practice, that has not happened. In the history of Vanguard ETFs, only three times has a diversified stock ETF distributed a capital gain, and I don't think the mutual fund class had much effect on those three. Vanguard FTSE All-World Ex-US Small Cap, which is mostly ETF shares, started near the 2009 market bottom, so it had capital gains on everything when it needed to sell to meet early index changes; it distributed gains in 2009 and 2010. Vanguard International Dividend Achievers distributed a capital gain in 2021 when it changed its index. (In contrast, I expected a capital gain from Emerging Markets Index when South Korea was reclassified as developed, but that didn't happen.)

The fact that mutual fund shareholders create trading costs could affect the ETF shareholders, although Vanguard imposes purchase fees to compensate existing shareholders in both classes for those mutual fund classes which have significant trading costs (Long-Term Bond Index, Intermediate-Term Corporate Bond Index, and Long-Term Corporate Bond Index).
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Re: Investors Sue Vanguard

Post by rob »

alex_686 wrote: Wed Mar 16, 2022 12:22 pm IMHO Vanguard dropped the ball but did nothing legally wrong.
Some of us stupidly expected something more than "nothing legally wrong" from Vanguard - call me naive or drinking the cool-aid..... I used target funds for my kids UTMA's, so not only do they get hit with the gains - it's all kiddie tax level PITA.... This is basically the last straw for me - looking at options but there is no easy option since I have (FAR prefer I guess) to keep taxable outside a brokerage account and I also own a lot of taxable stuff that does not have a matching ETF (I stupidly though the Tax Managed funds were a long term play). Tax deferred - is on it's way somewhere else when I talk to the Schwab, eTrade and Fido reps to get the best bribe.... er bonus.....
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by VTI »

grabiner wrote: Wed May 25, 2022 7:27 pm
VTI wrote: Wed May 25, 2022 7:10 pm [...]
Some in this thread have defended Vanguard’s target fund debacle by explaining that their management structure left them no other option but to harm retail investors. If this is true, then clearly, one should clearly be cautious about holding any Vanguard mutual fund in a taxable account.

But Vanguard attaches ETFs to their mutual funds—thus, ETF holders should be at risk too.
[...]
In theory, Vanguard mutual funds with ETF classes should dilute the tax advantage of the ETF.

In practice, that has not happened. In the history of Vanguard ETFs, only three times has a diversified stock ETF distributed a capital gain, and I don't think the mutual fund class had much effect on those three. Vanguard FTSE All-World Ex-US Small Cap, which is mostly ETF shares, started near the 2009 market bottom, so it had capital gains on everything when it needed to sell to meet early index changes; it distributed gains in 2009 and 2010. Vanguard International Dividend Achievers distributed a capital gain in 2021 when it changed its index. (In contrast, I expected a capital gain from Emerging Markets Index when South Korea was reclassified as developed, but that didn't happen.)

The fact that mutual fund shareholders create trading costs could affect the ETF shareholders, although Vanguard imposes purchase fees to compensate existing shareholders in both classes for those mutual fund classes which have significant trading costs (Long-Term Bond Index, Intermediate-Term Corporate Bond Index, and Long-Term Corporate Bond Index).
Thank you for your great answer.

In a stampede similar to what we saw with Vanguard's target date funds, am I wrong to believe ETF investors would inevitably suffer, too? I imagine the ETF creation/redemption process couldn't absorb the massive flows.

For example, if Vanguard lowered the minimums for their institutional S&P 500 fund, the exodus from the retail VFIAX would dwarf the normal daily flows.
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Re: Vanguard's Tax surprise in 2021

Post by alex_686 »

sycamore wrote: Wed May 25, 2022 2:09 pm It sure seems like it could've been avoided, although I'm not privy to the exact timing of events as they unfolded.
Merging funds is not easy. It is a long, cumbersome process. It has been a decade since I last had to deal with this, but IIRC it takes somewhere between 1 to 2 years to pull it off. The board members would have needed considerable wisdom and foresight to avoid this issue. Then again, they are paid the big bucks because they should have wisdom and foresight.
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Re: Investors Sue Vanguard

Post by alex_686 »

rob wrote: Wed May 25, 2022 7:40 pm
alex_686 wrote: Wed Mar 16, 2022 12:22 pm IMHO Vanguard dropped the ball but did nothing legally wrong.
Some of us stupidly expected something more than "nothing legally wrong" from Vanguard - call me naive or drinking the cool-aid..... I used target funds for my kids UTMA's, so not only do they get hit with the gains - it's all kiddie tax level PITA.... This is basically the last straw for me - looking at options but there is no easy option since I have (FAR prefer I guess) to keep taxable outside a brokerage account and I also own a lot of taxable stuff that does not have a matching ETF (I stupidly though the Tax Managed funds were a long term play). Tax deferred - is on it's way somewhere else when I talk to the Schwab, eTrade and Fido reps to get the best bribe.... er bonus.....
Why the instance on mutual fund only accounts? While I think mutual funds and ETFs are roughly equivalent today from the investor perspective the writing is on the wall, mutual funds are withering and ETFs is the winning structure. We are going to see more of this class of issues in mutual funds in future years.
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Re: Vanguard's Tax surprise in 2021

Post by billaster »

alex_686 wrote: Wed May 25, 2022 8:14 pm
sycamore wrote: Wed May 25, 2022 2:09 pm It sure seems like it could've been avoided, although I'm not privy to the exact timing of events as they unfolded.
Merging funds is not easy. It is a long, cumbersome process. It has been a decade since I last had to deal with this, but IIRC it takes somewhere between 1 to 2 years to pull it off. The board members would have needed considerable wisdom and foresight to avoid this issue. Then again, they are paid the big bucks because they should have wisdom and foresight.
But they didn't even need to merge funds. They could have just set the same lower fees for both the retail and institutional funds. Then there would have been no incentive for the stampede from one fund to the other. That is what they did eventually anyway by merging the funds. Resetting fees would have relatively trivial.

Or, if merging was their ultimate goal and would take time, they could have first set fees the same and then later taken their time on the merger.

The mystery is why they didn't take these simple steps to minimize harm to small retail investors.
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Re: Investors Sue Vanguard

Post by rob »

alex_686 wrote: Wed May 25, 2022 8:17 pm Why the instance on mutual fund only accounts? While I think mutual funds and ETFs are roughly equivalent today from the investor perspective the writing is on the wall, mutual funds are withering and ETFs is the winning structure. We are going to see more of this class of issues in mutual funds in future years.
Because people working in some areas of financial services are limited around brokerage accounts due to employment reasons.... Employers require that trades be tracked and a lot of those companies have a select list of brokerage houses they are prepared to deal with (and can get duplicate statements/notifications)... sometimes that includes Vanguard brokerage and sometimes (a lot of times?) not. A mutual fund only account is usually exempt since it cannot trade individual securities....

I'm not really been a troglodyte here... Some people have limitations - employment and large locked in gains with no available ETF share-class - that are ignored by the just move and be trendy crowd....
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by rkhusky »

VTI wrote: Wed May 25, 2022 7:54 pm For example, if Vanguard lowered the minimums for their institutional S&P 500 fund, the exodus from the retail VFIAX would dwarf the normal daily flows.
I don't see a flood of investors switching to the institutional index for 0.005% lower ER. That's $50 for a $1M investment. (and the minimum for VINIX is currently $5M)
Last edited by rkhusky on Wed May 25, 2022 9:21 pm, edited 2 times in total.
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by retiringwhen »

VTI wrote: Wed May 25, 2022 8:40 pm I'd be inlined to agree, but as you implied, Vanguard reserves the same right to in-kind redemptions with their target date funds, too. They declined to use it.
There were over 100,000 transactions made (8,000 companies with at least 12 TDF date funds on average per institutional account) that happened last year in the first 9 months of 2021. I have argued earlier that the overhead to execute those transactions was prohibitive and automation was out of the question unless planned ahead of time.

Besides, Vanguard was in no position to plan or reach out to the majority of the investors as the funds are held at different brokerages like Schwab and Fidelity where Vanguard had no control or relationship with the investors.

If you want, please read the earlier thread for my case.
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by billaster »

retiringwhen wrote: Wed May 25, 2022 9:18 pm
VTI wrote: Wed May 25, 2022 8:40 pm I'd be inlined to agree, but as you implied, Vanguard reserves the same right to in-kind redemptions with their target date funds, too. They declined to use it.
I have argued earlier that the overhead to execute those transactions was prohibitive and automation was out of the question unless planned ahead of time.
Seems rather irresponsible to instigate mass redemptions without planning for the consequences ahead of time -- particularly since those redemptions weren't even necessary to begin with.
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by Flyer24 »

A post was deleted that was pushing the moderators. The proper venue is to simply report a post and not publicly dictate a thread.
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Re: [Vanguard sued over taxable distributions in Target Date Funds]

Post by LadyGeek »

This thread has run its course and is locked. The discussion is derailed on conjecture and is no longer productive. The discussion is also getting contentious.

Bear in mind that the media will cover the lawsuit as the case progresses. Let's wait until the lawsuit has been settled.

At that point, we can reopen the thread (or start a new one) to discuss actionable ways to proceed.

Also note we locked the Vanguard whistleblower lawsuit discussion for the same reason. See: Re: Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds] (May 18, 2018)
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