Written by Chris Prentice and Jonathan Stempel
(Reuters) – Vanguard Group will pay $106.4 million to settle U.S. Securities and Exchange Commission charges alleging it failed to disclose important tax information about its popular target-date funds, leaving hundreds of thousands of ordinary investors on the hook for inflated tax bills.
The settlement stemmed from Vanguard’s decision in December 2020 to reduce the minimum investment in low-cost fund categories reserved for institutional clients to $5 million from $100 million.
This has resulted in many eligible investors shifting from higher-cost retail fund categories.
The retail funds then had to sell assets to meet redemption requirements, passing on the significant tax burdens from capital gains to remaining investors, the SEC said.
While Vanguard warned target-date fund investors that their tax burdens may change from year to year, it did not warn about this risk when investors switch to institutional funds from retail funds, the SEC said.
Vanguard’s target date funds contain a mix of stocks, bonds and cash that are designed to become less risky as investors age. They are also designed to be tax efficient.
The restitution includes $92.9 million in restitution, plus a civil penalty of $13.5 million. Vanguard neither admitted nor denied any wrongdoing in agreeing to the settlement.
“Materially accurate information about capital gains and tax implications is critical for investors saving for their retirement,” Corey Schuster, head of the Asset Management Unit of the SEC’s Enforcement Division, said in a statement.
Vanguard said in a statement that it was pleased with the settlement, and “committed to supporting the more than 50 million everyday investors and retirement savers who trust us with their savings.”
The settlement also resolves claims by a coalition of regulators in 43 US states, Washington, D.C., and the US Virgin Islands, led by the attorneys general of New York and New Jersey and the Connecticut Department of Banking.
In November, Vanguard agreed to pay $40 million to settle similar claims in a lawsuit brought by fund investors. It also agreed to pay $6.25 million in July 2022 to settle similar claims to Massachusetts Secretary of State William Galvin.
The Valley Forge, Pennsylvania-based company had $10.4 trillion in assets under management as of Nov. 30, 2024.
(Reporting by Chris Prentice and Jonathan Stemple; Editing by Aurora Ellis)