The logo for the Vanguard Group is shown on correspondence in Zelienople, Pa.
Keith Srakocic | AP
Asset management giant Vanguard has been fined more than $100 million to settle charges related to disclosures around target date investment funds, the Securities and Exchange Commission announced 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 customers moved from other target date funds into the institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard failed to properly disclose the nature of those distributions.
“The order finds that, as a result, retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of the potential compounding growth of 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 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 us with their savings. We’re 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.
The fine highlights how investors can see large tax bills even when they themselves do not make any asset sales during 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 spurred retirement plan investors to cash out of the investor share class of these funds and swap into the institutional version, according to the SEC.
Vanguard then had to sell the underlying assets in the investor share class of the funds to meet the redemptions from departing investors, the SEC found. As a result, shareholders who stayed in the investor share class were subject to a large capital gains distribution – and a tax liability if they held the fund in a taxable brokerage account, according to the order.
Normally, target date funds remain in tax-deferred accounts like 401(k) plans or individual retirement accounts – which would avoid a tax hit from a large capital gains distribution.
The violations took place under former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard from BlackRock in 2024.
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