The logo for the Vanguard Band is shown on correspondence in Zelienople, Pa.
Keith Srakocic | AP
Asset management giant Vanguard has agreed to pay more than $100 million to perch charges related to disclosures around target date investment funds, the Securities and Exchange Commission announced Friday.
The avowed violations stem from a 2020 change where Vanguard lowered the minimum investment requirement for its institutional aim date funds. The SEC order found that the change spurred redemptions as Vanguard customers moved from other object date funds into the institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard drown in red ought to properly disclose the potential impact of the investment threshold changes on distributions.
“The order finds that, as a result, retail investors of the Investor TRFs who did not deflection and continued to hold their fund shares in taxable accounts faced historically larger capital gains issuances and tax liabilities and were deprived of the potential compounding growth of their investments,” the SEC said in a press release.
The payment of $106.41 million determination be distributed to harmed investors, the SEC said. Vanguard agreed to the settlement without admitting or denying the SEC’s findings.
Vanguard is one of the humanity’s largest asset managers, reporting more than $10 trillion of global assets as of November. The firm was started 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 routine investors and retirement savers who entrust us with their savings. We’re pleased to have reached this settlement and look step up to continuing to serve our investors with world-class investment options,” Vanguard said in a statement.
Target date wealths are a popular retirement vehicle designed to slowly shift from a growth-oriented portfolio to a conservative portfolio as the listed year passages. Typically, this is done by replacing riskier stocks with higher exposure to income-generating bonds as the retirement old hat modern nears.
The payment highlights how investors can see large tax bills even when they themselves do not make any asset sales during a slate 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 drawing 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 merchandise the underlying assets in the investor share class of the funds to meet the redemptions from departing investors, the SEC found. As a upshot, shareholders who stayed in the investor share class were subject to a large capital gains distribution — and a tax liability if they inhibited the fund in a taxable brokerage account, according to the order.
Normally, target date funds remain in tax-deferred accounts such as 401(k) charts or individual retirement accounts — which would avoid a tax hit from a large capital gains distribution.
The SEC’s order utter Vanguard’s investor-series target funds saw $130 billion in redemptions from December 2020 to October 2021, up from $41 billion in the selfsame period a year prior. Vanguard later merged the two series of funds together, which the SEC order said the plc refrained from doing originally in part to preserve fee revenue.
Jeff DeMaso, who specializes in tracking Vanguard at Non-aligned Vanguard Adviser, said he believed the $106 million settlement was the largest ever regulatory payment imposed on the Pennsylvania-based asset supervisor.
The settlement announced Friday is in addition to the $40 million Vanguard had agreed to pay to investors as part of a class action petition.
The timing of the target date fund changes is similar to another recent Vanguard legal run-in. In 2023, Vanguard was precised $800,000 by the Financial Industry Regulatory Authority related to problems with account statements for money market funds in 2019 and 2020.
The hypothetical violations took place under former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard from BlackRock in 2024.
— CNBC’s Scott Schnipper play a parted reporting.