Vanguard Group, the largest U.S. manager of mutual fund assets, agreed to pay $40 million to settle a lawsuit claiming it stuck ordinary investors in its popular target-date retirement funds with surprisingly large tax bills.

Over the past 50 years or so, active funds’ returns have converged toward those of their underlying indexes, research finds. Small-cap funds are the exception.

Target-date fund holders who invested through taxable accounts absorbed a giant capital gains distribution because of the firm's flub, the plaintiffs say.