Vanguard fined more than $100 million by SEC for pension fund violations by date

Asset management giant Vanguard has been fined more than $100 million pay off the charges The Securities and Exchange Commission announced the target-date mutual fund disclosures on Friday.

The alleged violations are related to a 2020 change in which Vanguard lowered the minimum investment requirements for its institutional target funds. The SEC order found that the change spurred redemptions as Vanguard clients switched from other mutual funds to the institutional versions, creating a taxable distribution for some of the remaining shareholders. The SEC said Vanguard failed to adequately disclose the potential impact of investment threshold changes on distributions.

“The ruling found that as a result, TRF Investor retail investors who did not switch and continued to hold their fund shares in taxable accounts faced historically large capital gains distribution and tax liabilities and were deprived of potential growth in their investments. “, the SEC said in a press release.

A penalty of $106.41 million will be distributed among affected investors, the SEC said. Vanguard agreed to 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 firm was founded 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 ordinary investors and retirement savers who entrust their savings to us. 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.

Target-date funds are a popular retirement vehicle designed to slowly transition from a growth-oriented portfolio to a conservative portfolio as the specified year approaches. This is typically done by swapping riskier stocks for higher-yielding bonds as you approach your retirement date.

The penalty highlights how investors can see big tax bills even if they don’t sell assets themselves during the calendar year. When Vanguard lowered the minimum initial investment in its institutional target pension funds to $5 million from $100 million in December 2020, it prompted pension plan investors to cash out the funds’ investor share class and switch to the institutional version, the SEC said. .

Vanguard then had to sell the underlying assets in the fund’s investor share class to cover redemptions by exiting investors, the SEC found. As a result, shareholders remaining in the investor share class were subject to large capital gains distributions – and tax liability if they held the fund in a taxable brokerage account, according to the order.

Typically, the funds remain in tax-deferred accounts until a certain date, such as 401(k) plans or individual retirement accounts — avoiding the tax hit of a large capital gain distribution.

The SEC order said that from December 2020 to October 2021, Vanguard Investor Series mutual funds received $130 billion, compared to $41 billion in the same period a year earlier. Vanguard later merged the two series of funds, and the SEC filing said the company initially refrained from doing so in part to preserve fee income.

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

The timing of the fund’s target date changes is similar to Vanguard’s other recent legal battle. In 2023, there was Vanguard fined 800 thousand dollars Financial industry regulator over problems with money market fund account statements in 2019 and 2020.

The alleged violations occurred under former CEO Tim Buckley. Current CEO Salim Ramji joined Vanguard from BlackRock in 2024.