Vanguard Group has agreed to settle a lawsuit that accused the investment company of causing higher tax bills for investors in its target-date funds, reported Reuters.

The mutual fund giant reached an agreement in principle after engaging in private mediation, according to a recent court filing in Philadelphia federal court.

The details of the settlement are yet to be disclosed.

US District Judge John Murphy, who previously rejected a $40m settlement proposal in May, is expected to be approached for preliminary approval of the new settlement by 22 September.

The judge had criticised the earlier settlement amount, noting that it would not effectively benefit investors, especially after legal fees were deducted, the news agency further added.  

He also pointed out that Vanguard could potentially offset the settlement amount from another settlement it made with the US Securities and Exchange Commission earlier in January.

This legal action originated from a shift by Vanguard in December 2020, which involved the lowering of the minimum investment threshold in cheaper fund classes for its institutional clients to $5m from $100m.

The adjustment led to a migration of investors from higher-cost retail classes to these institutional classes, triggering asset sales and transferring taxable capital gains to investors to the remaining holders.

Vanguard, headquartered in Valley Forge, Pennsylvania, has assets under management totalling $10.4tn as of January 2025.

The company expressed satisfaction with the settlement, while lawyers for the investors have not commented on the matter, the report said.

The case, In re Vanguard Chester Funds Litigation, is being heard in the U.S. District Court for the Eastern District of Pennsylvania, under case number 22-00955.

Recently, a Texas federal court ruled against dismissing a lawsuit that claimed Vanguard Group, BlackRock, and State Street’s asset management branch engaged in anti-competitive behaviour in the coal industry.