Vanguard's tax-bill snafu settled, lends ammo to target-date fund critics

Without admitting or denying allegations of a slip-up that saddled thousands of target date fund investors with huge tax bills, Vanguard agreed to pay millions of dollars in restitution and a fine.

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Vanguard Marketing, whose parent and affiliates make up one of the largest asset managers at $8 trillion in assets under management, will pay $6.25 million to settle the Massachusetts Securities Division’s charges. The state alleged that Vanguard’s opening of institutional funds to more investors left the remainder with “higher than usual” capital gains distributions and taxes. The July 6 settlement, which followed the regulator’s investigation of TDFs and a Wall Street Journal article in January on the problem, requires Vanguard to pay for some of the taxes.

The case highlights a concern among some financial advisors and other experts about the potential shortcomings of TDFs. Critics say the funds, which focus on maximizing returns for a date years or decades into the future, can sometimes be examples of “set it and regret it” products instead of “set it and forget it.” 

Read more: Vanguard to pay some — not all — of tax bills created for TDF investors

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