Fine handed out by the US SEC comes after disclosure failures in target date retirement funds
Vanguard, one of the largest asset management firms in the world, has agreed to pay $106.41 million to settle charges from the U.S. Securities and Exchange Commission (SEC) over inadequate disclosures related to its target date investment funds. The settlement resolves allegations tied to a 2020 change in Vanguard’s institutional target date funds that impacted investors in taxable accounts.
The SEC investigation focused on Vanguard’s decision to lower the minimum investment requirement for its institutional target retirement funds from $100 million to $5 million. This adjustment prompted many retirement plan investors to exit the retail versions of the funds in favor of the institutional series, which triggered substantial redemptions. To meet the redemptions, Vanguard sold off underlying assets in the retail share class, leading to large taxable capital gains distributions for investors who remained in the retail funds.
According to the SEC, Vanguard failed to adequately disclose the potential consequences of the minimum investment change on taxable accounts. “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 stated in its press release.
The settlement funds will be distributed to affected investors. Vanguard agreed to resolve the charges without admitting or denying the SEC’s findings.
Taxable Impact of Target Date Fund Changes
Target date funds in the US are generally held in tax-deferred accounts like 401(k)s or IRAs. In these accounts, investors avoid immediate tax implications from capital gains distributions. However, investors holding target date funds in taxable brokerage accounts were directly impacted by Vanguard’s actions.
The SEC order revealed that between December 2020 and October 2021, Vanguard’s investor-series target date funds experienced $130 billion in redemptions, a sharp increase compared to $41 billion during the same period a year earlier. The heavy outflows and associated asset sales caused significant tax consequences for remaining shareholders.
Although Vanguard eventually merged its investor and institutional series funds to address the issue, the SEC noted that the firm initially avoided this step in part to protect its fee revenue.
Repercussions for Vanguard
This settlement is one of the largest regulatory penalties ever imposed on Vanguard, according to Jeff DeMaso, an expert who tracks the firm at Independent Vanguard Adviser. In addition to the SEC settlement, Vanguard had previously agreed to pay $40 million to investors as part of a related class-action lawsuit.
Vanguard’s reputation as a low-cost, investor-focused firm has taken a hit in recent years due to several legal and regulatory challenges. In 2023, the Financial Industry Regulatory Authority (FINRA) fined Vanguard $800,000 for issues related to account statements for money market funds in 2019 and 2020.
In a statement, Vanguard reiterated its commitment to its clients: “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.”
The alleged disclosure violations occurred during the tenure of former CEO Tim Buckley. Vanguard’s current CEO, Salim Ramji, who joined from BlackRock in 2024, has inherited the responsibility of steering the company through these challenges.
