Vanguard recently lowered the minimum investment for institutional class shares of its target date retirement funds. That seems like a good thing, right? After all, that will lower the cost of these TDR funds for some inside 401(k) and other workplace retirement accounts.
Unfortunately, the result was a tax nightmare for individual investors who owned these funds in taxable accounts. And it provides a very important lesson to us for how to manage our taxable investments.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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UPDATE: Was chatting with Rick Ferri about this issue via Twitter. If I understand his comments correctly, this issue likely won't arise with funds that have ETF equivalents, like the S&P 500 index fund I mentioned in the video. Balanced funds, however, could in theory could see this issue occur again. All of that said, I'm still now in favor of ETFs.
Well luckily I'm not interested in any taxable account because I can't save enough to max out everything, but I don't quite understand why converting over to an ETF would make you safe from problem you mentioned. Is it because Vanguard doesn't have institutional etfs?
Today, Tax Day, I had to come up with close to 30k to cover both Fed. and State taxes. This is a direct result of Vanguards callous disregard for the middle to small Invester (Jack Bogle would have taken them to the woodshed kicking and screaming} When you decide on a Law firm, and I hope you do, please let us know. I am sure I am not alone. Their soul duty as a fiduciary is to act in my best interest. Can they honestly say, with a straight face, that this is what they accomplished?
Hello Rob – first time viewer and what a subject to kick off with. Our advisor suggested we move most our non-retirement money to the VG's 2025 fund to simplify our financial lives and we an enormous tax hit. I bet this wipes out all the so called low-cost saving we've had in many years of investing with Vanguard. Vanguard was one thing I didn't think I had to worry about, but completely lost trust at this point. Very grateful for your video and especially for some of the suggestions at the end in what to do about it, as small of comfort as some of those ETFs might be.
Rob can you please do an updated video regarding recent lawsuit against Vanguard regarding this
Same thing happened to me. Can you convert the vanguard Target Retirement Funds into ETSs? I don't think they have an ETF equivalent.
It is one thing to be a typical investment firm that makes no bones about who they are and quite another if you are Vanguard who claims to be on the small investors side but clearly is lying about that. I will vote with my feet. Screw me once, etc. etc.
Super mad at Vanguard about this. Unfortunately, the target date funds don't have an ETF equivalent, so there's no chance to get out of the TDFs tax free. I was hoping there would be a way to exchange the TDF for the same funds that it holds, in a proportional manner, but it seems that would trigger capital gains. Unless someone knows something different, I think you're stuck if you have the TDF in a taxable account unless you want to recognize more capital gains to get out.
I cant imagine with all the backlash Vanguard is getting from this that they would do this again. It is disappointing because I've always felt like John Bogle and Vanguard stood for the little guy and now that seems to have changed.
I guess since Index funds aren't actively managed; could this really happen to index funds?
Like, that was very informative Rob, thanks! I didn't realize just by changing the fund minimum requirement for the institutional investors cause a domino effect on us. I held the Target Fund in my Taxable Account first and didn't open the Non-Taxable until a year later. After this incident, I just transferred my Vanguard Target Fund into my Non-Taxable Account. I'm curious, will next year happens the same thing or this is just a one time thing for these Target Funds? And just like you, I also have other Mutual Funds from Vanguard such as the S&P, High Dividend, and the International Fund, if one of these funds happen like the Target Fund, I'll be switching all to ETF. The downside to that, have to buy a full share at a time, no auto contribution, probably more. Vanguard needs to update to Fractional Share for these to happen, they're outdated compare to other brokers.
Here is a hard truth – brokerage firms are NOT on your side, they are NOT looking out for you; personal investors are an annoyance to them because they must work harder for less money. They would much rather pander to large institutional investors because they make so much more money from them.
Watched the video and decided to look into the tax free transfers of my target date and balanced index vanguard mutual funds to ETFs. I could be wrong, and would appreciate if someone else would look into this, but from what I see you can't make a tax free transfer of these funds as there are not corresponding Vanguard ETFs for them. Is this correct? Also, what options are available for tax friendly accounts for my taxable investments going forward. I'm retired so I can't put anything else in my Roth.
The happened to me and triggered a $5k tax bill with no real capital gains. Shame on Vanguard
I would be selling vanguard mutual fund and move to etf’s. Thanks for sharing this.
I have a Goldman Sachs Mutual Fund GAPAX, it seems like this fund did the same thing, as the above Vanguard, as there is also an institutional fund GAPIX. If I want to move to an ETF, does there have to be a matching Dynamic Global Equity ETF to offset tax burden? Thank you for the channel and your thoughts.
Jack Bogle would be rolling in his grave if he knew Vanguard did this to their individual clients
Seems like the accounts that were redeemed should be the ones to pay the tax.
This is exactly what happened. Thanks for the very clear explanation.
Thanks for the explanation. I have VTTHX in a traditional IRA at Vanguard and noticed the unusually large distributions at the end of 2021 and wondered what happened. On top of that, about the same time, the share price dropped by nearly $5 . I suspected the two events were linked. Not too worried about the price drop right now. Its a double edge sword. IRA account took a noticeable dip in value but I buy more shares for the dollar with the lower price. Again, thanks for the explanation. I now have a better understanding of what happened and learned something along the way. Subscribed.
Thanks for explaining this! What vanguard did was pretty crazy, but thankfully they cannot do the same with the same funds.
Still trying to fully understand this. This affected target date funds in 2021. For those TDFs was that a one time, one year event, or could this happen again to those same funds in future years?
I'm really surprised that people are holding target date funds in taxable accounts. I'm even more surprised that they couldn't just transfer the shares from one fund to another. That an IRS thing?
ETFs can and do distribute capital gains. I dont see the advantage. Both Fidelity and Morgan Stanley mutual funds distributed huge capital gains this last december. If you are trying to run away from this behavior, where you gonna go.
So if you had $100,000 in this fund you got $17,000‽
40 Act funds need some legislation!
Was this due to all those private equity firms allowed to getting into targeted date funds?
More importantly the video should mention if you invest in target date funds, you are either lazy, stupid or both. None of my money goes into these types of funds for that reason.
Please someone answer: I realize no one wants to pay the resulting taxes now, and if the gains weren't distributed, the gains would compound. But wouldn't the taxes have to be paid eventually anyway? Won't the capital gain taxed now not have to be paid later because of a higher cost basis?
wow, how would you respond to the ice cream server if they left the Cherry off the top of your Sundae…….
Excellent explanation! Yes, I got badly burned. Shame on Vanguard.
I own ETFs only. I'll NEVER buy their stupid Target date retirement funds.
Vanguard minimum standards are way behind other brokerage firms. Many places don't have these rediculous requirements. (Fidelity, Robinhood, Wealthfront, many others)
BOHICA
Worked there. They are doing good things. You’ll understand soon.
Once a novice investor 30 years ago, I saw this done at another mutual fund family. It struck me as very strange. Now I fully understand why it happened. I have investments at Vanguard, but I'll be extremely cautious now.
I just discovered your channel and subscribed. This time of year we become more tax sensitive and yes that was an unfortunate situation. I remember a fellow lamenting a similar event that happened to him after a hard market correction which resulted in high capitol gains to his S&P 500 index fund.
Thanks and I will try to catch up with your content.
I just don't understand what is to be upset by all of this. So lets say that there was a major economic collapse and stocks dropped 50%. These target date funds have to maintain the balance of stocks to bonds that they promise to customers. The process of rebalancing from bonds to stocks would cause huge capital gains (assuming bonds prices spiked due to fight to safety) The main point is that you should not be holding any balanced fund or mutual fund not tied to an ETF in a taxable account. Also lets be real here. If you have a taxable account your doing way better then 90% of your neighbors. The limits on contributing to traditional and roth 401k accounts are so high that your income has to be way above average to even consider investing in a taxable account, assuming that you are a long term investor saving for retirement. If your investing for short term growth, taxes are the name of the game. I save 25% of my income and I am nowhere near close to maxing out my Solo Roth 401K contribution limits plus I also max out a Traditional IRA every year.
So this scenario could effect VTSAX? I’m just trying to make sure I understand. You would convert VTSAX to the VTI version?
You take more time to explain than my Finance guy.
Very nicely articulated. Thank you.
Would like to hear your advice on whether this stuff will survive the climate change coming in the future. Perhaps in a capitalist society, the owners will always get richer no matter what?
Taken the hit? If I also took this tax "hit" for 2021 in a taxable account, am I now basically "good" i.e. this shouldn't be a recurring event? Didn't see this addressed after a cursory glance through the comments.
I agree vanguard dropped the ball here. Before last year I might have suggested to someone who wanted a hands off portfolio to consider just holding a Target Date fund. Until last year the inefficiency has been minimal and simplicity has value. I wasn’t hit by this as I hold the TDF in tax advantaged. I think this underscores the need to unbundle investments in taxable.
Wait, does this affect target date funds in Roth IRAs? Or only traditional IRAS?
You said it: “Trust”
Vanguard is a legacy operation. Bogle may have looked like an Old-Princetonian patriarch, but he was rebel.
Until his dying day he took pleasure in explaining the faults of the financial services industry.
I don’t see that any of his successors have made as bold a step in favor of the modest “owner-investor”.
As far as I can tell the top management is composed of MBAs who have a consultant or market analyst mentality not really experienced in running a business.
Trust is not a primary objective for people who think they are Wall Street players.
As a result
Thanks for the content. As someone in their 20s and trying to get an active hold on retirement, this is very helpful in terms of seeing the big picture when it comes to interacting with these companies.