Vanguard fined more than $100 million by SEC over violations involving target date retirement funds

Asset management giant Vanguard has been fined more than $100 million to resolve charges in relation to disclosures around target date investment funds, the Securities and Exchange Commission announced on Friday.

The violations stem from a 2020 change where Vanguard lowered the minimum investment requirement for its institutional target date funds. The SEC order found that the change spurred redemptions as Vanguard clients moved from other target date funds into institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard failed to adequately disclose the potential impact of investment limit changes on distributions.

“The order finds that, as a result, retail investors of TRF Investors who have not changed and continue to hold their shares of funds in taxable accounts have historically faced greater distributions of capital and liabilities taxes 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 agreed to the fine without admitting or denying the SEC’s findings.

Vanguard is one of the world’s largest asset managers, which reported more than $10 trillion in global assets as of last November. The firm was founded by Jack Bogle in the 1970s and has a reputation as a low-cost, investor-friendly firm.

“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust their savings to us. We are pleased to have reached this facility and look forward to continuing to serve our investors with options d ‘first class investment’, Vanguard. he said in a statement.

The end highlights how investors can see large tax bills even when they themselves do not sell assets during a calendar year. When Vanguard lowered the minimum initial investment for its institutional target retirement funds to $5 million from $100 million in December 2020, it incentivized retirement plan investors to cash in from the share class investors of these funds and exchange in the institutional version, according to the SEC. .

Vanguard has to sell the underlying assets in the fund’s investor share class to meet redemptions from departing investors, the SEC found. As a result, shareholders who have been in the investor share class have been subjected to a large distribution of capital gains – and a tax liability if you hold the fund in a taxable brokerage account, according to the order.

Typically, target date funds remain in tax-deferred accounts such as 401(k) plans or individual retirement accounts — which will avoid a tax hit from a large capital gain distribution.

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 target date fund changes is similar to another recent Vanguard legal run. In 2023, Vanguard was fined $800,000 by the Financial Industry Regulatory Authority in relation 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.

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