Vanguard to pay more than $100M over target-date fund violations

Vanguard to pay more than $100M over target-date fund violations
The mutual fund titan harmed investors by failing to disclose risks relating to capital gains distributions in its retail target-date retirement funds, according to the SEC.
JAN 17, 2025

Vanguard is set to pay $106.41 million to settle charges from the Securities and Exchange Commission for reportedly making misleading statements regarding its target date retirement funds.

In an order published Friday, the SEC said Vanguard misled investors with respect to capital gains distributions and resulting tax consequences for retail investors who held those target retirement funds in taxable accounts. 

The SEC order cited Vanguard’s decision in December 2020 to lower the minimum investment for its institutional target retirement funds from $100 million to $5 million.

That move led to widespread redemptions among retirement plan investors, who switched from Vanguard's investor target retirement funds to the institutional products, which came with lower expenses. 

To meet the demand from redeeming investors, the SEC said Vanguard's investor target-date funds had to sell underlying assets that had appreciated in value. The retail investors who stayed in the funds and held shares in taxable accounts were effectively punished, the SEC explained, as they faced significant tax liabilities from higher-than-normal capital gains distributions.

The SEC also found that the 2020 and 2021 prospectuses for its investor target retirement funds were materially misleading. While they stated that capital gains distributions could vary due to "normal" investment activities, the documents failed to disclose the risk of elevated distributions stemming from the redemptions by newly eligible investors switching to lower-cost institutional funds.

The SEC concluded that Vanguard lacked adequate policies to ensure the accuracy of its disclosures.

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” Corey Schuster, chief of the SEC’s Division of Enforcement’s Asset Management Unit, said in a statement Friday. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”

As part of the settlement, Vanguard agreed to be censured and to cease and desist from future violations. The $106.41 million penalty includes $18.2 million in disgorgement and interest, a $13.5 million civil penalty, and payments that will satisfy $92.91 million in relief ordered through settlements with states, including New York, New Jersey, and Connecticut.

The settlement comes in addition to $40 million that Vanguard agreed to pay to resolve a separate investor class-action lawsuit in federal court in Pennsylvania, according to the SEC.

Related Topics:
Vanguard 401k: A new investors guide to the basics

Latest News

'Bogged down' advisors just want to have fun (again)
'Bogged down' advisors just want to have fun (again)

Jim Cahn, of Wealth Enhancement Group, lifts the lid on his firm's partnership model, his views on RIA M&A, and the widely slept-on reason why advisors are merging into larger organizations.

Vestwell unveils new emergency savings account offering
Vestwell unveils new emergency savings account offering

The fintech firm is cementing its status in the workplace savings space with its latest ESA offering, which employers can integrate into their existing benefits package.

'Money Mimosas' and other ways to show your Valentine financial love
'Money Mimosas' and other ways to show your Valentine financial love

Wealth managers offer unique ideas for couples to grow closer emotionally and financially.

Limra research finds financial confidence on the rise among Black American workers
Limra research finds financial confidence on the rise among Black American workers

Survey findings suggest increased sense of financial security and more optimistic 2025 outlook, while highlighting employers' role in ensuring retirement readiness.

DOGE efforts sideswipe muni bonds backed by federal lease payments
DOGE efforts sideswipe muni bonds backed by federal lease payments

Falling prices for some securities within the $4 trillion state and local government debt market spotlight how the push to shrink spending is sending shockwaves across the US.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.