The Vanguard Group logo appears on correspondence in Zelienople, Pennsylvania.
Keith Srakocic | P.A.
Asset management giant Vanguard was fined more than $100 million for pay the fees related to disclosures about target date investment funds, the Securities and Exchange Commission announced Friday.
The alleged violations stem from a change in 2020, in which Vanguard lowered the minimum investment requirement for its institutional target date funds. The SEC order found that the change spurred redemptions as Vanguard clients switched from other target-date funds to institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard failed to properly disclose the potential impact of investment threshold changes on distributions.
“The order concludes that as a result, retail investors in FTR Investors who did not convert and continued to hold their fund shares in taxable accounts faced capital gains distributions and historically larger tax obligations and have been deprived of the potential compound growth of their investments,” the SEC said in a press release.
The $106.41 million fine will be distributed to harmed investors, the SEC said. Vanguard accepted the fine without admitting or denying the SEC’s findings.
Vanguard is one of the world’s largest asset managers, reporting more than $10 trillion in global assets as of last November. The company was founded by Jack Bogle in the 1970s and has a reputation for being a low-cost, investor-friendly company.
“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings. We are pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options,” Vanguard said. said in a statement.
Target date funds are a popular retirement vehicle designed to slowly transition from a growth-oriented to a conservative portfolio as the designated year approaches. Typically, this is done by replacing riskier stocks with higher exposure to income-producing bonds as the retirement date approaches.
The fine shows that investors can see large tax bills even if they don’t make any asset sales themselves in a calendar year. When Vanguard lowered the minimum initial investment of its target institutional retirement funds from $100 million to $5 million in December 2020, it prompted retirement plan investors to withdraw from the investor share class of these funds and exchange them for the institutional version, according to the SEC. .
Vanguard then had to sell the underlying assets of the funds’ investor share class to accommodate redemptions from exiting investors, the SEC found. As a result, shareholders who remained in the investor share class were subject to a significant capital gains distribution – and a tax liability if they held the fund in a taxable brokerage account, according to the prescription.
Normally, target date funds remain in tax-deferred accounts like 401(k) plans or individual retirement accounts – which would avoid the tax due to a large capital gains distribution.
The SEC order says Vanguard’s Investor Series target funds experienced redemptions of $130 billion between December 2020 and October 2021, compared to $41 billion during the same period a year earlier. Vanguard then merged the two fund series, which the SEC order said the company originally refrained from doing, in part to preserve fee revenue.
The fine announced Friday is in addition to the $40 million Vanguard agreed to pay investors in a class-action lawsuit.
The timing of the target date fund changes is similar to another recent Vanguard legal skirmish. In 2023, Vanguard was a fine of $800,000 by the Financial Sector Regulatory Authority concerning problems with money market fund account statements in 2019 and 2020.
The alleged violations took place under the leadership of former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard from BlackRock in 2024.
