Vanguard to pay more than $100 million to SEC over violations involving target date retirement funds

Table of Contents

• The supposed infractions arose from a 2020 change where Vanguard reduced the minimum investment threshold for its institutional target date funds.
• The SEC announced that payments totaling $106.41 million will be made to investors who were impacted. Vanguard agreed with the SEC's conclusions without admitting to them or refuting them.
• Vanguard is one of the world's largest asset management companies, with over $10 trillion in assets globally as of November.

The U.S. Securities and Exchange Commission made an announcement on Friday regarding disclosures for target date investment funds.

The supposed violations came from a change Vanguard implemented in 2020, which reduced the minimum investment needed for its institutional target date funds. The SEC's order determined that the change led to a rush of withdrawals as customers switched to the institutional versions from other target date funds, causing taxable distributions for some of the remaining shareholders. The SEC stated that Vanguard did not accurately report the potential effects of the investment threshold changes on distributions.

The SEC said in a news release that because of this, retail investors who held onto their Investor TRFs in taxable accounts and didn't switch faced unusually large capital gains distributions and tax bills, and lost out on the potential for their investments to continue to grow.

The SEC stated that $106.41 million in payments will be distributed to investors who were impacted. Vanguard agreed to the settlement without admitting or denying the allegations made by the SEC.

Vanguard is one of the planet's largest investment managers, reporting more than $10 trillion of global assets as of November. The company was founded by Jack Bogle in the 1970s and is known for being low-cost and customer-friendly.

"We're dedicated to helping over 50 million ordinary investors and retirees who have entrusted us with their financial savings. We're satisfied with the outcome of this settlement and look forward to continuing to serve our investors with top-notch investment opportunities," Vanguard stated.

For instance, in the context of retirement planning, target date funds are a popular investment vehicle that automatically adapt their asset allocation as a certain year approaches. The goal of these funds is to gradually move from a mix of stocks that tend to grow more quickly to a more conservative blend of income-generating bonds, which is typically riskier. This shift usually starts closer to the anticipated retirement year.

The payment shows how investors can still face big tax bills, even if they didn't sell any assets during the past year. When Vanguard reduced its initial investment minimum for its retirement funds from $100 million to $5 million in December 2020, many retirement plan investors switched from the investor share class to the institutional version after learning about the change, according to the SEC.

If they held the fund in a taxable brokerage account, following the order.

Typically, target date funds stay in tax-deferred accounts like 401(k) plans or individual retirement accounts to head off a large tax bill from a significant capital gains distribution.

The SEC's order stated that Vanguard's target funds aimed at investors experienced a net outflow of $130 billion from December 2020 to October 2021, more than triple the $41 billion seen in the same period the previous year. The order also noted that Vanguard chose not to combine the two series of funds initially in order to preserve revenue from fees.

Vanguard Adviser representative Jeff DeMaso stated that he believed the $106 million settlement was the largest regulatory penalty ever imposed on the Pennsylvania-based asset manager.

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

By the Financial Industry Regulatory Authority pertaining to issues with account statements for money market funds in 2019 and 2020.

The alleged misdeeds occurred when former CEO Tim Buckley was in charge. Current CEO Salim Ramji came on board from BlackRock in 2024.