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

[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.

Yes and no. The Vanguard Target date funds are funds of funds and all of the sub-funds are indices. They are "actively managed" in the sense that humans picked the proportion of which index funds would go into each Target fund. But they don't play with them beyond that.

[Anonymous]

Anonymous wrote:

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.

I would expect more than one. Just Google for them once a week.

[Anonymous]

Just clarifying -- as the OP -- I was not the one who posted that I would love to join a class action law suit if there is one. That was someone else.

[Anonymous]

Anonymous wrote:Just clarifying -- as the OP -- I was not the one who posted that I would love to join a class action law suit if there is one. That was someone else.

(This is a total aside, but can I ask why you felt like that needed clarification? I can't think of a reason why being mistakenly understood to be looking to participate in a class action on this would be problematic. It is a very straightforward consumer protection situation.)

[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?

Regarding #1: It's actually bigger than just Target Date Funds. ANY MUTUAL FUND (from Vanguard or any other trading house) could do this to you IF there is another identical fund for institutional investors (i.e. usually employers who have A LOT of money to invest). If there are two funds (one for little investors and one for institutional investors), it's possible that the investment firm (in this case Vanguard, but next time it could be TRPrice or Fidelity or Schwab) could stick a huge tax bill to investors in the "regular" fund by luring many of the investors into the "institutional" fund by drastically lowering the minimum investment.

This completely unexpected situation was caused by Vanguard and is unlikely to happen in other funds or in other investment firms -- but it could.

Vanguard could have lowered the minimum investment in the institutional Target Date Funds from $100mil to $90mil. And then moved slowly (over a period of YEARS) to reduce the entry ticket for the institutional funds. But dropping the minimum investment from $100mil to $5mil all at once, it created a stampede of investors with portfolios of $5mil-$100mil LEAVING the regular fund in 12 months time. That's why this happened.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Just clarifying -- as the OP -- I was not the one who posted that I would love to join a class action law suit if there is one. That was someone else.

(This is a total aside, but can I ask why you felt like that needed clarification? I can't think of a reason why being mistakenly understood to be looking to participate in a class action on this would be problematic. It is a very straightforward consumer protection situation.)

To clarify that there is more than one person affected by this, and the OP (me) was not the one speaking. The next thing someone will write on this thread is that "OP is just looking to make money with lawsuits... etc" and going down that line of attack.

[Anonymous]

... But, I (OP) will gladly take restitution if offered! I'm just not seeking it out. I'm sure any class action plaintiff can find me if they want.

[Anonymous]

Anonymous wrote:

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?

Regarding #1: It's actually bigger than just Target Date Funds. ANY MUTUAL FUND (from Vanguard or any other trading house) could do this to you IF there is another identical fund for institutional investors (i.e. usually employers who have A LOT of money to invest). If there are two funds (one for little investors and one for institutional investors), it's possible that the investment firm (in this case Vanguard, but next time it could be TRPrice or Fidelity or Schwab) could stick a huge tax bill to investors in the "regular" fund by luring many of the investors into the "institutional" fund by drastically lowering the minimum investment.

This completely unexpected situation was caused by Vanguard and is unlikely to happen in other funds or in other investment firms -- but it could.

Vanguard could have lowered the minimum investment in the institutional Target Date Funds from $100mil to $90mil. And then moved slowly (over a period of YEARS) to reduce the entry ticket for the institutional funds. But dropping the minimum investment from $100mil to $5mil all at once, it created a stampede of investors with portfolios of $5mil-$100mil LEAVING the regular fund in 12 months time. That's why this happened.

How do we know if there is an equivalent institutional fund?? I am also invested in the life strategy fund.

I'm just another regular investor looking to "set it and forget it" with my small amount of funds. I don't know how to keep up with all of this! I don't even have a tax accountant.

[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.

Can you explain this please? I opened a Vanguard brokerage account in November 2021 (invested in a Target Retirement Fund), I have lost money in the account in the two months I have held it due to poor stock market performance, and now Vanguard has issued me a 1099 saying I had $14,000 in capital gains in this account in 2021. I absolutely did not, so this isn't a question of paying taxes on my earnings. I have a net loss in this account.

[Anonymous]

Anonymous wrote:

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.

Can you explain this please? I opened a Vanguard brokerage account in November 2021 (invested in a Target Retirement Fund), I have lost money in the account in the two months I have held it due to poor stock market performance, and now Vanguard has issued me a 1099 saying I had $14,000 in capital gains in this account in 2021. I absolutely did not, so this isn't a question of paying taxes on my earnings. I have a net loss in this account.

PP is wrong in your case. You can and do have capital gains and a net loss. Your basis, in your situation, is likely to be lower, not higher. So you got screwed even more than long-term investors did, unless you eventually use net losses in this account to offset gains elsewhere (which is what I would do in your shoes--take the loss and move this $ to ETFs).

But the PP's advice is correct for all of us who have seen net gains in the account.

For you, the share value declined between when you bought the fund and when the cap gains and dividends paid out (avoid new taxable investments in November, friend!). Then Vanguard engaged in trading within the fund to satisfy the selloff they created that generated capital gains for all remaining shareholders (you were still a shareholder).

Assuming you reinvest dividends and cap gains, what happened when you got those capital gains and dividends was that you bought more shares at a lower price and your average basis has therefore declined. Sell now, harvest the loss, and put this money in an ETF instead.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Just clarifying -- as the OP -- I was not the one who posted that I would love to join a class action law suit if there is one. That was someone else.

(This is a total aside, but can I ask why you felt like that needed clarification? I can't think of a reason why being mistakenly understood to be looking to participate in a class action on this would be problematic. It is a very straightforward consumer protection situation.)

To clarify that there is more than one person affected by this, and the OP (me) was not the one speaking. The next thing someone will write on this thread is that "OP is just looking to make money with lawsuits... etc" and going down that line of attack.

Ha! Someone who thinks (or pretends they think) that $1m makes you a large shareholder at Vanguard will try it but they will sound very silly.

Anyway, I'm also in for whatever the class action is. This was some BS.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

Can you explain this please? I opened a Vanguard brokerage account in November 2021 (invested in a Target Retirement Fund), I have lost money in the account in the two months I have held it due to poor stock market performance, and now Vanguard has issued me a 1099 saying I had $14,000 in capital gains in this account in 2021. I absolutely did not, so this isn't a question of paying taxes on my earnings. I have a net loss in this account.

PP is wrong in your case. You can and do have capital gains and a net loss. Your basis, in your situation, is likely to be lower, not higher. So you got screwed even more than long-term investors did, unless you eventually use net losses in this account to offset gains elsewhere (which is what I would do in your shoes--take the loss and move this $ to ETFs).

But the PP's advice is correct for all of us who have seen net gains in the account.

For you, the share value declined between when you bought the fund and when the cap gains and dividends paid out (avoid new taxable investments in November, friend!). Then Vanguard engaged in trading within the fund to satisfy the selloff they created that generated capital gains for all remaining shareholders (you were still a shareholder).

Assuming you reinvest dividends and cap gains, what happened when you got those capital gains and dividends was that you bought more shares at a lower price and your average basis has therefore declined. Sell now, harvest the loss, and put this money in an ETF instead.

Thank you. I appreciate the explanation. I obviously made some bad choices, investing in November and into the retirement fund. So, if I sell now, this will show as a capital loss on next year's tax statement? Since this is a retirement fund (vs. regular mutual fund) am I not allowed to simply convert to the ETF? I need to sell and then re-purchase? Thanks. I'm wondering if I should move it all out of Vanguard after this.

[Anonymous]

Anonymous wrote:

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?

Regarding #1: It's actually bigger than just Target Date Funds. ANY MUTUAL FUND (from Vanguard or any other trading house) could do this to you IF there is another identical fund for institutional investors (i.e. usually employers who have A LOT of money to invest). If there are two funds (one for little investors and one for institutional investors), it's possible that the investment firm (in this case Vanguard, but next time it could be TRPrice or Fidelity or Schwab) could stick a huge tax bill to investors in the "regular" fund by luring many of the investors into the "institutional" fund by drastically lowering the minimum investment.

This completely unexpected situation was caused by Vanguard and is unlikely to happen in other funds or in other investment firms -- but it could.

Vanguard could have lowered the minimum investment in the institutional Target Date Funds from $100mil to $90mil. And then moved slowly (over a period of YEARS) to reduce the entry ticket for the institutional funds. But dropping the minimum investment from $100mil to $5mil all at once, it created a stampede of investors with portfolios of $5mil-$100mil LEAVING the regular fund in 12 months time. That's why this happened.

The reason institutional investors got out quick is because the new fund offered lower fees.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Just clarifying -- as the OP -- I was not the one who posted that I would love to join a class action law suit if there is one. That was someone else.

(This is a total aside, but can I ask why you felt like that needed clarification? I can't think of a reason why being mistakenly understood to be looking to participate in a class action on this would be problematic. It is a very straightforward consumer protection situation.)

To clarify that there is more than one person affected by this, and the OP (me) was not the one speaking. The next thing someone will write on this thread is that "OP is just looking to make money with lawsuits... etc" and going down that line of attack.

OP, LOL. I think you are a nutcase not for starting the thread (and I thank you for that) but what you said above is pretty nutty.

[Anonymous]

Although it did not impact me, I am stunned that Vanguard would do this. Completely forseeable and unethical. Bogle would be ashamed.