A U.S. federal judge has rejected a $40 million settlement proposed by Vanguard Group to resolve claims that the investment firm left investors with unexpected tax liabilities tied to its target-date mutual funds. The judge ruled that the deal offered no real benefit to affected investors due to a larger, overlapping settlement already reached with federal regulators.

U.S. District Judge John Murphy, presiding in Philadelphia, found that the November class-action agreement would effectively be offset by Vanguard’s earlier $135 million settlement with the U.S. Securities and Exchange Commission (SEC). Since that federal deal included $40 million in investor remediation, the judge determined that the class settlement would merely duplicate compensation already secured—without providing any added value.

In his 25-page ruling, Murphy sided with objector John Hughes, an investor and attorney, who argued that the class action would ultimately shortchange claimants. More than $13 million of the settlement would have gone to lawyers' fees, leaving investors with less than they would receive under the SEC arrangement, which didn’t reduce payouts for legal costs or require investors to give up their rights to future claims.

"The math doesn't lie," Murphy wrote, criticizing the redundancy of the settlement and noting that the SEC deal already delivers the same financial outcome to investors without the drawbacks of the class action. Therefore, he concluded that the settlement failed to meet legal standards of fairness, reasonableness, and adequacy.

Vanguard and the plaintiffs’ attorneys have not yet responded publicly to the decision. Hughes declined to comment, though Vanguard had previously argued that he misunderstood the terms of the SEC settlement. The company also warned that rejecting this class settlement might make it more difficult for firms to resolve similar civil and regulatory cases simultaneously.

The legal disputes stem from Vanguard’s December 2020 decision to significantly lower the minimum investment requirement for its lower-cost institutional target-date fund share classes—from $100 million to $5 million. That change prompted a wave of investors to shift away from higher-fee retail classes, leading to mass redemptions that forced the funds to sell off assets. This, in turn, triggered capital gains taxes for the remaining retail investors—contrary to the funds’ tax-efficient design.

Vanguard, headquartered in Valley Forge, Pennsylvania, oversees approximately $10.4 trillion in assets. The case, officially titled In re Vanguard Chester Funds Litigation, continues in the U.S. District Court for the Eastern District of Pennsylvania under case number 22-00955.