Vanguard to pay more than $100 million to SEC for retirement fund violations

Asset management giant Vanguard has agreed to pay more than $100 million settle charges The target date related to mutual fund disclosures was announced by the Securities and Exchange Commission on Friday.

The alleged violations stem from a 2020 change 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 moved from other target-date funds to institutional versions, creating a tax break for some remaining shareholders. The SEC said Vanguard failed to adequately disclose the potential impact of changes in the investment threshold on distributions.

“The order states that, as a result, retail investors in TRFs who did not switch and continued to hold their fund shares in taxable accounts historically had higher capital gains distributions and tax liabilities and were deprived of the potential compounding growth of their investments,” the SEC said in a press release. in a note

A payment of $106.41 million will be distributed to affected 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 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 50 million investors and retirement savers who entrust their savings to us every day. We are pleased to have reached this agreement and look forward to continuing to serve our investors with world-class investment opportunities,” Vanguard. he said in a statement.

Target-date funds are popular retirement vehicles designed to slowly transition from a growth-oriented to a conservative portfolio as the listed year approaches. Typically, this is done by replacing riskier stocks with higher exposure to income-producing bonds as the retirement date approaches.

The payment highlights how investors can face large tax bills even if they themselves sell no assets in 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 prompted retirement plan investors to move out of the investor share class of those funds and into the institutional version, according to the SEC. .

Vanguard then had to sell the underlying assets of the fund’s investor share class to meet bailouts from departing investors, the SEC found. As a result, shareholders who remained in the investor share class were subject to a large capital gains distribution, and 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 distribution of a large capital gain.

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 pools of funds, and the SEC order said the company did not initially charge fees to retain income.

Jeff DeMaso, a Vanguard-tracking expert at Independent Vanguard Adviser, said he believed the $106 million settlement was the largest regulatory payout ever for a Pennsylvania-based asset manager.

The settlement announced Friday is in addition to the $40 million Vanguard agreed to pay investors as part of a class action lawsuit.

The timing of the target date fund changes is similar to another recent legal announcement from Vanguard. In 2023, it was Vanguard $800,000 fine Financial Industry Regulatory Authority issues related to money market fund disclosures 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.