By Gustavo Frazao @Shutterstock
I’m not a big fan of target date funds especially in non-retirement accounts where the allocation is adjusted automatically based on your years to retirement. The stock side tends to hug the S&P 500 and the bonds have longer maturities than I’m comfortable with. In addition, the timing of the selling may not be in line with your tax situation in any given year.
Last year institutional investors in Vanguard’s target date funds sold their positions when Vanguard offered them another set of funds to buy. That left retail investor holding the bag, stuck paying the tax bill on the realized gains. (In a mutual fund realized gains in the fund are mutually shared.) That’s another reason I’m not a huge fan of these funds especially in non-retirement accounts. Now the lawsuits are flying. We’ve seen this movie before. The WSJ reports:
Vanguard hadn’t explicitly warned investors that the funds could generate gigantic tax bills, the Journal reported. One investor told the Jour
nal that he incurred a roughly $150,000 surprise tax bill in 2021 on his holdings in Vanguard’s Target Retirement 2035 fund.
In January, following the Journal’s report, Massachusetts regulators launched an investigation into how Vanguard had marketed the funds. As part of the settlement, Vanguard will establish a $5.5 million restitution account for eligible Massachusetts investors, the state’s Securities Division said. Vanguard also will cover $750,000 in costs for the state.
In the agreement, Vanguard neither admitted nor denied wrongdoing.
Action Line: If you own target date funds in retirement accounts, hold your nose. If you own target date funds in non-retirement accounts beware you might be stuck with an unexpected tax bill. When you own your own dividend paying stocks you control the selling. If you need help crafting a mix of dividend payers let me know.
