Vanguard Fined More Than $100 Million by SEC for Deadline Retirement Fund Violations

Asset management giant Vanguard has been fined more than $100 million for resolve charges related to disclosures about target-date mutual funds, the Securities and Exchange Commission announced Friday.

The 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 boosted redemptions as Vanguard clients moved from other target-date funds to the institutional versions, creating taxable distributions for some of the remaining shareholders. The SEC said Vanguard did not adequately disclose the potential impact of changes to the investment threshold on distributions.

“The order finds that, as a result, retail investors in the TRFs of investors who did not convert and continued to hold their fund holdings in taxable accounts faced historically higher capital gain distributions and tax liabilities and were deprived of the potential compound growth of their investments,” the SEC said in a press release.

The $106.41 million fine will be distributed among harmed investors, the SEC said. Vanguard accepted 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 in global assets as of last 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 retirement investors and savers who trust us with their savings. We are pleased to have reached this agreement 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 face large tax bills even when they themselves do not make any asset sales during a calendar year. When Vanguard lowered the minimum initial investment for its target institutional retirement funds from $100 million to $5 million in December 2020, it spurred retirement plan investors to withdraw cash from these funds’ investor share class and convert them to the institutional version, according to the SEC. .

Vanguard then had to sell the underlying assets in the funds’ investor share class to meet redemptions from exiting investors, the SEC found. As a result, shareholders who remained in the investor share class were subject to a large capital gains distribution – and a fiscal responsibility whether 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 a tax hit from a large capital gains distribution.

The SEC order said funds targeted by Vanguard’s investor series recorded $130 billion in redemptions from December 2020 to October 2021, up from $41 billion in the same period a year earlier. Vanguard later merged the two fund series, which the SEC order said the company originally refrained from doing in part to preserve fee income.

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

The timing of the fund’s target date changes is similar to another recent Vanguard legal dispute. In 2023, Vanguard was fined $800,000 by the Financial Industry Regulatory Authority in connection with issues with money market fund account statements in 2019 and 2020.

The alleged violations took place during the administration of former chief executive Tim Buckley. Current CEO Salim Ramji joined Vanguard from BlackRock in 2024.

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