(Reuters) -A federal judge approved Vanguard Group's $25 million settlement of a lawsuit accusing the U.S. mutual fund company of improperly saddling investors in its target-date funds with inflated tax bills.

U.S. District Judge John Murphy in Philadelphia granted preliminary approval on Monday, calling the settlement sufficiently fair, reasonable, and adequate, after rejecting a $40 million settlement on May 19.

Murphy objected because Vanguard could have offset the $40 million from its related January settlement with the U.S. Securities and Exchange Commission, and investors would be better off with the SEC accord because there were no legal fees.

Lawyers for the investors said the $25 million is in addition to a $133 million fair fund set up in the SEC case.

Target-date funds contain mixes of stocks, bonds, and cash that are designed to become less risky as investors get older, and to be tax-efficient.

Vanguard was sued after deciding in December 2020 to reduce the minimum investment in lower-cost fund classes meant for institutional clients to $5 million from $100 million.

Many investors moved to those fund classes from higher-cost retail classes. This forced retail funds to sell assets to meet redemptions and pass taxable capital gains to the plaintiffs and other remaining investors.

Vanguard denied wrongdoing in agreeing to settle. The Valley Forge, Pennsylvania-based firm had $11 trillion of assets under management as of July 31.

Murphy scheduled a January 6, 2026, hearing to consider final settlement approval.

The case is In re Vanguard Chester Funds Litigation, U.S. District Court, Eastern District of Pennsylvania, No. 22-00955.