quote:

Originally posted by 220-9er:
I don't know who wrote that article or what their motivation was.
I don't consider myself to be a especially sophisticated investor but the things they are complaining about are very basic to me.
Besides that, Vanguard and Fidelity are clearly marketed as no frills companies that offer low fees but not (in most cases) lots of extra advise or planning services. In return they charge very low fees.
These people are paying big capitol gains because they had big returns. The larger number than normal that were selling because they had made big returns and are hedging their bets in case of a market downturn. They clearly didn't follow what's happening to their investments and the market in general, at all and were asleep at the switch.

It isn’t obvious, but it appears you may be unclear on what happened. It isn’t that these mutual fund holders sold their mutual fund shares because they had big gains and thus had to pay big taxes. What happened was that the mutual funds had a lot of redemptions because a lot of big investors (company plans) sold shares in the “small fry” funds to move into the “larger investor” funds when the minimum on the “larger investor” funds was lowered from $100M to $5M. In order to cover the redemptions, the “small fry” funds had to sell shares (causing a taxable gain event for fund shareholders). I could see where one could argue that the gains should be allocated to those who sold their mutual fund shares rather than those who stayed in, but apparently that isn’t the way it is done.

Lack of control over what gets bought and sold when is one reason I stay away from mutual funds in taxable accounts, period. I don’t much like them in retirement accounts either, but that is a separate issue.

Yes, if you are going to invest you should do more research than most do, and “you pays your money and you takes your chances” holds true, but it wasn’t quite so silly as the investors making the choice to sell and then whining about the taxes.

will be interesting to see if lawsuit originates from this

(not that i agree or support that)

the distributions for this 'consolidation event' -- (which appears to be a unique occurrence) were orders of magnitude higher than in a normal year. pretty much a complete blindside.

yes -- the vast majority of this type of fund are in tax-deferred accounts so it's no issue for them. but for the small percentage held in taxable accounts this could be a massive tax head-ache.

i'd be curious to read through the prospectus and see if it mentions anything about potentially massive portfolio turnover on occasion. one of the 'implied' benefits of this type of investment is low turnover -- sticking with plain indexes -- with 're-balancing' occurring gradually

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quote:

Originally posted by slosig:

quote:

Originally posted by 220-9er:
I don't know who wrote that article or what their motivation was.
I don't consider myself to be a especially sophisticated investor but the things they are complaining about are very basic to me.
Besides that, Vanguard and Fidelity are clearly marketed as no frills companies that offer low fees but not (in most cases) lots of extra advise or planning services. In return they charge very low fees.
These people are paying big capitol gains because they had big returns. The larger number than normal that were selling because they had made big returns and are hedging their bets in case of a market downturn. They clearly didn't follow what's happening to their investments and the market in general, at all and were asleep at the switch.

It isn’t obvious, but it appears you may be unclear on what happened. It isn’t that these mutual fund holders sold their mutual fund shares because they had big gains and thus had to pay big taxes. What happened was that the mutual funds had a lot of redemptions because a lot of big investors (company plans) sold shares in the “small fry” funds to move into the “larger investor” funds when the minimum on the “larger investor” funds was lowered from $100M to $5M. In order to cover the redemptions, the “small fry” funds had to sell shares (causing a taxable gain event for fund shareholders). I could see where one could argue that the gains should be allocated to those who sold their mutual fund shares rather than those who stayed in, but apparently that isn’t the way it is done.

Lack of control over what gets bought and sold when is one reason I stay away from mutual funds in taxable accounts, period. I don’t much like them in retirement accounts either, but that is a separate issue.

Yes, if you are going to invest you should do more research than most do, and “you pays your money and you takes your chances” holds true, but it wasn’t quite so silly as the investors making the choice to sell and then whining about the taxes.

+1

I'll also add that this is a fund that only owns 5 other Vanguard Index Funds. It's historically been pretty tax efficient as the underlying index funds don't change much and the 2035 and 2040 are too far out for allocations to change meaningfully. As an example of how extraordinary this is:

2020 LT capital gain was $0.1313 per share

2021 LT capital gain was $7.5559 per share which is 57.5 times greater. So somebody who is used to getting $500 in LT capital gains is suddenly hit with $28,750.

---

Ego is the anesthesia that deadens the pain of stupidity

DISCLAIMER: These are the author's own personal views and do not represent the views of the author's employer.

Not only the sudden capital gain, but not actually having the cash from the sale to pay the tax, so the investors sell shares of the mutual fund to raise the cash which snowballs the effect.

[/QUOTE]
It isn’t obvious, but it appears you may be unclear on what happened. It isn’t that these mutual fund holders sold their mutual fund shares because they had big gains and thus had to pay big taxes. What happened was that the mutual funds had a lot of redemptions because a lot of big investors (company plans) sold shares in the “small fry” funds to move into the “larger investor” funds when the minimum on the “larger investor” funds was lowered from $100M to $5M. In order to cover the redemptions, the “small fry” funds had to sell shares (causing a taxable gain event for fund shareholders). I could see where one could argue that the gains should be allocated to those who sold their mutual fund shares rather than those who stayed in, but apparently that isn’t the way it is done.

Lack of control over what gets bought and sold when is one reason I stay away from mutual funds in taxable accounts, period. I don’t much like them in retirement accounts either, but that is a separate issue.

Yes, if you are going to invest you should do more research than most do, and “you pays your money and you takes your chances” holds true, but it wasn’t quite so silly as the investors making the choice to sell and then whining about the taxes.[/QUOTE]



If the funds were in an IRA or 401K version (tax sheltered/deferred), they would still be tax sheltered/deferred in the transfer as I understand it. In that case there wold be no tax consequence.
When they are outside of the tax sheltered status, any year there are gains that need to be paid at year end, shares get sold off to pay them and you get your part paid to you as a shareholder and a 1099 for the gain.

That particular year, the gains may have shown as much higher due to the sales required to pay the dividend or gains as required in that fund by Vanguard and yes, this was an unusual circumstance.

I understand they (the customers of Vanguard) didn't sell them themselves to cash out and earn a profit. Vanguard sold them to pay out that years need for funds per their agreement.

When I've owned funds like that I got that statement every year where they sold shares for similar reasons and to adjust my own personal books. Mine were in tax deferred accounts so they sold shares to pay the dividends but reinvested the proceeds into more shares as they were retained as tax deferred. You make that choice when you set up the account and can change it at any time.

As others have said, there will likely be some legal action filed as a result of this and maybe a payout of some sort due to the way things work. That's not a business I'm in so I don't really know.

quote:

Not only the sudden capital gain, but not actually having the cash from the sale to pay the tax, so the investors sell shares of the mutual fund to raise the cash which snowballs the effect.

Solution - tell Vanguard to take out 24% FITW from the distribution. Problem solved.

Here are the estimated capital gains issued in late November 2021 by Vanguard for the Target Retirement funds. The information was out there.

This message has been edited. Last edited by: 229DAK,

Take out 24% from where? And once you’ve thought that through, take it another step further to see how it exacerbates the problem rather than solving it.

quote:

Originally posted by trapper189:
Take out 24% from where? And once you’ve thought that through, take it another step further to see how it exacerbates the problem rather than solving it.

It comes out of your distribution. Vanguard pays out the dividend and/or capital gain, takes out the 24% FITW and sends it to the IRS, and then reinvests the rest into your fund.

Taking out 24% won't do it because the seller will incur tax on what he sells to raise the cash. At least it will be in a different tax year but the tax avalanche has started already.

quote:

It’s easy for a small investor to make big mistakes. It would be even easier for giant investment firms to help prevent them—but, sadly, the asset-management industry seems to have other priorities.

{snip}

“Sitting-Hawk,” ......... had about $3.6 million in taxable money in the fund.

They start out by talking about "small investors" and then their *only* example is some unknown guy on the internet who claims to have $3.6 Million in a single fund. Who writes this crap?

And seriously who doesn't know that cap gain distributions can vary year to year, sometimes by a large amount ? Time for the children to leave the room and leave let the adults handle it.

quote:

Originally posted by wishfull thinker:
Taking out 24% won't do it because the seller will incur tax on what he sells to raise the cash. At least it will be in a different tax year but the tax avalanche has started already.

The seller isn't 'taking out'/liquidating/selling any of his fund; hence, no tax incurred from that. Vanguard takes 24% from the capital gain distribution and sends it to the IRS for FITW, so the author's friend, “Sitting-Hawk”, doesn't have to sell anything. The author said he has a 23.8% federal tax bill - so the federal tax problem is solved.

I do this on two of my non-retirement Vanguard funds.

This message has been edited. Last edited by: 229DAK,

It is in the OP link. Jason Zweig

quote:

Originally posted by wishfull thinker:
^^^^Rey HRH
"I can't imagine them raising the management fees on the institution funds so the merger results in less management fees from the accounts that were in the non-institutional fund.

Someone fucked up."

They knew or should have known, and in finance it amounts to pretty much the same thing, what would happen when they pushed the switch.

Imagine the breakfast nook conversation:
sometime in December "hey honey are investments are doing swell, I think we should keep them."

Statement date in January: "Hey honey the mutual fund co. sold us out of a shit load of our fund and it's all taxable RTFN. Go ahead and unpack for Cancun."

It's on Vanguard. It was marketed and sold as an individual's investment when it was clear to the company that it was WAY less than ideal for those individuals.

Whether or not they get sued, and I suspect they will, they are going to lose a lot of customer goodwill.

P.S. on a corporate financial statement Good will shows up as an asset, by the way.

They raped a fund to enrich one class of investor at the expense of another class.

There's no goodwill on a mutual fund unless they bought out another mutual fund from a different company. Goodwill is only created when a company buys another company and the price paid is over the book assets.

They didn't rape one fund to enrich another class. All they did was to lower the minimum requirement for the lower expense institutional fund. What they didn't count on was a lot of investors who were in the higher expense fund now qualified for the lower expense fund. Should they have figured out this would happen? Yes. But in the end, they ended up with less management fees in the short term.

quote:

There's no goodwill on a mutual fund

Yeah, I know. I was making a lame joke comparing...never mind, lame joke. sorry.

The WSJ playing to those they are beholden to, and blaming Wall Street's arch enemy, Vanguard, for what the customers should have already known. Most likely hoping to scare folks away from the low cost passively-managed index funds to the higher cost actively managed funds.

^^^^^^^^^^^^
Really? It was opinion piece. Show me where WSJ views Vanguard as the arch enemy.

quote:

Originally posted by ZSMICHAEL:
^^^^^^^^^^^^
Really? It was opinion piece. Show me where WSJ views Vanguard as the arch enemy.

He said "Wall Street's Arch enemy", not WSJ.

On that point I agree 100% with Mikey Pizza. Vanguard and their founder John Bogle changed (reduced) a lot of the traditional fee structures from Wall Street.

Managed, traditional mutual funds with high fees vs. an unmanaged S&P 500 index fund with small fees --- that low fee alternative was all John Bogle / Vanguard and they didn't make friends on wall street with his offerings.

This is well documented. Look up John Bogle and you can see for yourself.

Ok Wall street may not like Bogle and his low cost funds, but I do not think this was a hit piece on Vanguard by the WSJ. The paper was printing an opinion piece.

quote:

Originally posted by ZSMICHAEL:
Ok Wall street may not like Bogle and his low cost funds, but I do not think this was a hit piece on Vanguard by the WSJ. The paper was printing an opinion piece.

Vanguard's target retirement funds aren't the only ones that paid out capital gains. The opinion author should point out where's Vanguard's asset allocation is flawed or different from the asset allocation of Schwab, Fidelty, etc.

https://www.thinkadvisor.com/2...eturn=20220027223207

Yea, I'd be this guy complaining - "One user, for example, said he owed more than $150,000 as a result of $550,000 in distributions he received in Vanguard’s Target Retirement 2035 fund, according to the Journal."

I retract my previous statements.

After reading more about this at the bogleheads.org forum, by folks who are pretty well up on this stuff, the consensus seems to be that Vanguard screwed up big time, in ways far too complicated to explain here. If interested, got to https://www.bogleheads.org/for...ic.php?f=10&t=366566