The logo for the Vanguard Group is featured on letters in Zelienople, Pa.
Keith Sracocic | AP
Asset management giant Vanguard has been fined more than $100 million settle costs related to disclosures about date investment funds, the Securities and Exchange Commission announced Friday.
The alleged violations stem from a change in 2020 where Vanguard lowered the minimum investment requirement for its institutional target date fund. The SEC order found that the change triggered leverage when Vanguard customers moved from other target date funds to the institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard failed to properly account for the potential impact of investment threshold changes on distributions.
“The order finds that, as a result, retail investors of the Investor TRFs that did not change and continued to hold their fund shares in accounts taxable against historically larger capital gains distributions and tax liabilities and that they were missing out on potential growth on their investments. “, the SEC said in a press release.
The fine of $106.41 million will be distributed to harmed investors, the SEC said. Vanguard agreed to 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 of global assets as of November. The company was founded by Jack Bogle in the 1970s and has a reputation as a low-cost, investor-friendly company.
“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who rely on their savings. We are pleased to have reached this settlement and look forward to to continue serving our investors with world-class investment options,” Vanguard said in a statement.
A target date fund is a popular retirement vehicle designed to slowly transition from a growth-oriented portfolio to a conservative portfolio as the target year approaches. Typically, this is done by replacing riskier stocks with more experienced income-generating bonds as the retirement date approaches.
The fine reflects how investors can see large tax bills even when they themselves do not sell any assets in a calendar year. When Vanguard dropped the minimum initial investment for its institutional target retirement funds to $5 million from $100 million in December 2020, it encouraged retirement plan investors to exit the investor share class of those funds and exchange into the institutional version, according to the SEC. .
Vanguard then had to sell the underlying funds in the mutual fund class to meet the outflows from departing investors, the SEC found. As a result, shareholders who remained in the investor share class were subject to the distribution of large capital gains – and a tax liability if they kept the assets in a taxable bankruptcy account, according to the order.
Typically, target-date funds remain in tax-deferred accounts such as 401(k) plans or individual retirement accounts—which avoid the tax consequences of distributing large capital gains.
The SEC order said Vanguard's investment series target fund saw $130 billion in redemptions from December 2020 to October 2021, up from $41 billion in the same period a year earlier. Vanguard later combined the two series of funds, which the SEC order said the company stopped doing at first in order to preserve tax revenue.
The fine announced Friday is in addition to the $40 million that Vanguard had agreed to pay to investors as part of a class action suit.
The timing of the date fund changes is similar to other recent Vanguard legal runs. In 2023, Vanguard was $800,000 fine by the Financial Industry Regulatory Authority related to problems with account statements for money market funds in 2019 and 2020.
The alleged violations occurred under former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard from BlackRock in 2024.
