Vanguard Target Date funds (in taxable accounts) --- WHAT IS GOING ON?

[Anonymous]

Anonymous wrote:

Anonymous wrote:I love how everyone complains about capital gains. Would you rather they lose money? And I bet the majority of the posters here think capital gain tax rates to increase.

It's not like the "capital gains" means that the funds made money. Vanguard SOLD a huge portion of its assets, triggering a huge capital gain, then re-invested the cash in the slimmed-down portfolio. The only reason Vanguard did that is because it lured a majority of the investors out of the Target Date funds and into the "Institutional Target Date Funds."

We're not talking about a small adjustment of investors moving from one to the other. Vanguard dropped the entry ticket for the institutional funds from $100million to $5million! That means the regular target date fund USED TO serve investors with $100million or less. NOW, the regular target date fund ONLY serves investors with $5million or less!

When all those investors left, Vanguard needed to sell off assets --- and the little guys with $5million or less got stuck with an astronomical tax bill.

Exactly as an investor you could actually have a loss in these funds depending on when you put your money in and still be hit with this large capital gains distribution. This is not paying tax on profit that you made, it is paying tax on profit the fund itself made years ago but that you might never have seen yourself.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Anyone find this kind of amusing? The bogleheads and FIRE crowds are so smug about their investing in index funds. I personally think diversity is so important. Index funds are fine but there is always a risk.

This specific issue has been discussed on the Bogleheads forum. It has nothing to do with index funds and everything to do with an investor being educated enough to know what they buying and about asset location. TDF do not belong in taxable accounts for a variety of reasons, this being one of them. Even ETFs have capital gains distributions.

Your response very much conflicts with the message I’ve seen shared over and over again by those who promote index funds. The message has been something along the lines of “index funds allows you to be a passive investor. You don’t need to research the funds. Do the three index fund approach. Put your money in the funds and sit back.”

It seems odd to me that now the promoters are saying you need to educate yourself about index funds and this happened because the investors are uneducated.

Target date funds do not equal index funds. TDR’s are actively managed, index funds are not.
Asset allocation is critical in investing. Where you put retirement funds vs taxable funds vs tax free funds is very important and has implications.

What VG did here was very weird but not illegal. They will probably get sued and we will see what happens.

Look at the underlying holdings of the vanguard target date funds that are under discussion here. These are a fund of funds and hold only index funds.

[Anonymous]

Anonymous wrote:Now that state attorneys general are investigating, there may end up being some restitution

Like what? I hope so but not likely is my guess.

[Anonymous]

Op here.

This isn't a flaw of Target Date funds. Any fund that has an identical "institutional" fund could end up in the same position. Vanguard knowingly lured a huge share of investors out of the regular fund, instigating a need for a huge sell off, and thereby triggering an unprecedented tax liability for the small minority of investors who weren't eligible for the perk of transferring to the institutional fund.

Dropping the entry ticket for the institutional fund from $100mil all the way down to $5mil, was obviously going to severely reduce the number of investors in the regular fund...to their detriment.

This could happen in the Vanguard S&P 500 fund, the Energy Fund, the Large Cap gund, ...literally ANY fund that has a twin version for institutional investors. No one thought Vanguard would make such a huge change...but we now see that they will screw over the "small" investor in favor of larger investors.

I'm trying to make lemonade out of this...the upside being that I'm now at a point in one fund where we could sell the whole tjing today, transfer to ETFs, and not have to pay any (additional) tax. The tax hit from Vanguard's cash out has cometely covered all the taxes I'd owe on my fund. I'm essentially at cost basis now because Vanguard "realized" all my previously unrealized gains. So, since we are already are forced to pay all the capital gains....might as well consider my options.

There's little chance that Vanguard would have the same thing happen with their Target Date funds again because they lowered the entry for institutional funds down to $5mil, there's no room for them to go lower and take more investors out of the regular target date fund (that I'm currently in). BUT, they could start messing with the underlying funds (total stock market fund, international fund, bond fund) and cause additional (albeit less severe) pain. Who trusts Vanguard now? Not me!

[Anonymous]

Ahh thanks for posting this OP. I just looked at our investments and yup, we are caught up in this. I thought I was being smart doing a "set it and forget it" approach with the target date funds but clearly I don't know enough and it wasn't smart.

I watched the video someone posted upthread which was helpful- but can someone explain to me like I'm 5 what is the best next step if we have let's say $100,000 in taxable target date funds? It sounds like we should convert them to ETFs? Are there taxes on that- I'm confused. help!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I love how everyone complains about capital gains. Would you rather they lose money? And I bet the majority of the posters here think capital gain tax rates to increase.

It's not like the "capital gains" means that the funds made money. Vanguard SOLD a huge portion of its assets, triggering a huge capital gain, then re-invested the cash in the slimmed-down portfolio. The only reason Vanguard did that is because it lured a majority of the investors out of the Target Date funds and into the "Institutional Target Date Funds."

We're not talking about a small adjustment of investors moving from one to the other. Vanguard dropped the entry ticket for the institutional funds from $100million to $5million! That means the regular target date fund USED TO serve investors with $100million or less. NOW, the regular target date fund ONLY serves investors with $5million or less!

When all those investors left, Vanguard needed to sell off assets --- and the little guys with $5million or less got stuck with an astronomical tax bill.

Exactly as an investor you could actually have a loss in these funds depending on when you put your money in and still be hit with this large capital gains distribution. This is not paying tax on profit that you made, it is paying tax on profit the fund itself made years ago but that you might never have seen yourself.

Very good point.

[Anonymous]

Anonymous wrote:Don't you pay these hefty taxes eventually and it's just a matter of when?

Yes, this is just prepaying taxes. Your basis will now be higher. But it’s not tax efficient for long term investments because you are reducing your investable income.

[Anonymous]

I am confused - so should we not invest in Vanguard TDFs anymore (for taxable accounts)?

What are "institutional funds" - should we invest in those instead or are they only if you have $5 million to invest?

Should I move all the money I have in VTSAX to the VTI instead? Will that trigger a massive tax hit?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Don't you pay these hefty taxes eventually and it's just a matter of when?

Yes, this is just prepaying taxes. Your basis will now be higher. But it’s not tax efficient for long term investments because you are reducing your investable income.

Also of you were going to pass these funds down to your heirs (or if you die soon unexpectedly) you won't benefit from the stepped up tax basis.

[Anonymous]

Anonymous wrote:

Anonymous wrote:https://m.youtube.com/watch?v=CxAEi42U3gU

15 min video but he gives an good overview of what happened and some potential risk for other Vanguard funds.

Very useful video, thanks for posting.

Yea, that was great - thanks for flagging this guy. He’s solid

[Anonymous]

Anonymous wrote:OP here again:

https://bucksco.today/2022/01/26/vanguard-change-target-retirement-funds/

I've always been a fan of Vanguard and we consolidated ALL of our investments with them (outside of TSP). I just want to cry right now because of this. I feel like Vanguard screwed us over -- like I believed in them 100% -- and they knifed me in the back.

They absolutely did MF shareholders on this. It's very surprising coming from them and pretty appalling. Fortunately I was only in for about $1000 in totally unnecessary cap gains. If I were in your shoes I would be looking for a class-action lawsuit to join.

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP here again:

https://bucksco.today/2022/01/26/vanguard-change-target-retirement-funds/

I've always been a fan of Vanguard and we consolidated ALL of our investments with them (outside of TSP). I just want to cry right now because of this. I feel like Vanguard screwed us over -- like I believed in them 100% -- and they knifed me in the back.

They absolutely did MF shareholders on this. It's very surprising coming from them and pretty appalling. Fortunately I was only in for about $1000 in totally unnecessary cap gains. If I were in your shoes I would be looking for a class-action lawsuit to join.

I'd love to if there is one.

[Anonymous]

Anonymous wrote:

Anonymous wrote:And you fools continue to pile into mutual funds where you know damn well this can happen

Okay we heard you 1000 times. You can rest now.

I mean, they can rest because it's clear they don't understand what happened here and what folks it happened to are complaining about. This was a giant selloff made necessary by a series of events Vanguard had 100% control over. They're not cap gains produced by the normal fluctuations of the market that would be typical for mutual funds constructed this way.

[Anonymous]

Anonymous wrote:I am confused - so should we not invest in Vanguard TDFs anymore (for taxable accounts)?

What are "institutional funds" - should we invest in those instead or are they only if you have $5 million to invest?

Should I move all the money I have in VTSAX to the VTI instead? Will that trigger a massive tax hit?

1. Yes

2. They are only if you have $5m to invest

3. No, probably not--Vanguard having done this once is very unlikely to do it again, but you should consider it with an eye towards what your gains will be when you sell. It's a taxable account, so yes, if there's a gain there will be tax. Whether it's massive or not is relative.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Now that state attorneys general are investigating, there may end up being some restitution

Like what? I hope so but not likely is my guess.

The AG leading the charge is from Massachusetts (home of Vamguard’s biggest competitor). I would expect some cash eventually