Target-Date Tax Snafu Costs Vanguard $6.25M So Far

Late last year, some investors in Vanguard’s target-date funds got hit with a hefty surprise tax bill. Now the firm has agreed to pay $6.25 million to settle a suit by the Massachusetts secretary of state. Massachusetts investors in Vanguard’s Target Retirement fund suit will get a payout of $5.5 million.

As we previously covered, the issue arose when Vanguard chose to reduce investment minimums and fees for certain institutional share classes. Savvy institutional investors swiftly moved to swap their existing shares for the new, lower-fee classes. The surge in outflows left many retail investors with taxable distributions of up to 28.8% late last year.

According to Massachusetts Secretary of State William Galvin’s office, more than 5,000 Massachusetts-based accounts were hit with huge tax bills as a result.

Target-date funds are often marketed as simple, set-it-and-forget-it options for investors who don’t want to actively monitor and rebalance their portfolios.

“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over main street investors,” said Galvin in a press release.

The rest of the $6.25 million settlement will go to administering a restitution fund ($250,000) and to the Commonwealth of Massachusetts ($500,000).

While Vanguard said in a press release that it’s “glad to put the matter behind us,” it’s not clear whether the Massachusetts settlement will resolve the issue or merely be the first domino to fall.

Chart of the Week: The Earnings Expectations vs. Reality Gap

Portfolio Manager Charlie Toole:

Wall Street analysts expect companies in the S&P 500 to report profits 4% higher than one year ago. If what’s past is prologue, we can expect two things: (1) That estimate is wrong and (2) it’s possibly too low.

Over the last four years, Wall Street analysts have made meteorologists look like soothsayers. On average, their predictions for earnings growth when companies start to report quarterly profits have missed the mark by about 9%. As baseball player Yogi Berra famously quipped, “It’s tough to make predictions, especially about the future.”

In addition to missing the mark, analysts have been too conservative. In 14 of the last 15 quarters, analysts’ estimates came in under companies’ actual results.

If the Street has set another low bar this quarter, then earnings growth that hurdles the consensus 4% estimate would be some much-needed positive news in a market that’s been dominated by negative headlines.

Podcast: Employee Stock Purchase Plans—When, Why and How To Use Them

Stock options can be a great wealth-building tool—but only if they’re used right. In this third episode in our trilogy, Manager of Financial Planning Andrew Busa and Financial Planner Michael Dillaire tackle the intricacies of maximizing your options and discuss employee stock purchase plans (ESPPs). Topics include:

• When and how much you can purchase through an ESPP
• How lookback periods can be used to maximize your options
• The tax benefits of using an ESPP
• What portion of your portfolio it’s wise to tie up in an ESPP

Working out just how much you can benefit from employee stock options isn’t easy. But it’s worthwhile. Our experts can help you navigate this tricky process. Listen now to learn more. Or check out our other episodes on stock option basics and restricted stocks. Thanks for tuning in!

Adviser’s Today’s Market Takeaways

In recent Today’s Market Takeaways, Vice President and Portfolio Manager Steve Johnson discussed recession probabilities, while Senior Research Analyst Liz Laprade discussed the fallout from the fall of crypto bank Celsius.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.