The logo for Vanguard Group is featured on correspondence in Zelienople, PA.
Keith Srakočić | AP
Asset management giant Vanguard has agreed to pay more than $100 million settle the charges regarding announcements about investment funds with a target date, the Securities and Exchange Commission announced on Friday.
The alleged violations stem from a 2020 change in which Vanguard lowered the minimum investment requirement for its target-date institutional funds. The SEC order found that the change spurred redemptions as Vanguard clients switched from other target-date funds to institutional versions, creating a taxable distribution 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 finds that, as a result, small investors of Investor TRFs who did not switch and continued to hold their fund holdings in taxable accounts faced historically higher capital gains distributions and tax liabilities and were deprived of potential growth in their investments. ,” the SEC said in a press release.
A payout of $106.41 million will be distributed to aggrieved investors, the SEC said. Vanguard agreed to the settlement 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 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 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 in a statement.
Target-date funds are a popular retirement vehicle designed to slowly transition from a growth-oriented portfolio to a conservative portfolio as the specified year approaches. This is usually done by replacing riskier stocks with higher exposure to income-generating bonds as your retirement date approaches.
The payment highlights how investors can see big tax bills even when they don’t sell any assets themselves during the calendar year. When Vanguard lowered the minimum initial investment for its institutional target pension funds to $5 million from $100 million in December 2020, it prompted pension plan investors to cash out the investment share class of those funds and switch to the institutional version, according to the SEC- in. .
Vanguard then had to sell the underlying assets in the fund’s investment unit class to satisfy redemptions from exiting investors, the SEC found. As a result, shareholders remaining in the investor share class were subject to large capital gains distributions – i tax liability if they held 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 would avoid the tax hit of a large capital gains distribution.
The SEC order said Vanguard’s Investor Series Target Funds redeemed $130 billion from December 2020 to October 2021, up from $41 billion in the same period a year earlier. Vanguard later merged the two series of funds, which the SEC order said the company initially refrained from doing in part to preserve fee income.
Jeff DeMaso, who specializes in tracking Vanguard at Independent Vanguard Adviser, said he believed the $106 million settlement was the largest regulatory payout ever imposed on the Pennsylvania-based asset manager.
The settlement announced Friday is in addition to the $40 million Vanguard agreed to pay to investors as part of a class action lawsuit.
The timing of the target date fund changes is similar to Vanguard’s other recent legal run. In 2023 Vanguard was fined 800 thousand dollars by the Financial Industry Regulatory Authority regarding problems with account statements for money 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.
— CNBC’s Scott Schnipper contributed reporting.