The Securities and Exchange Commission ordered Vanguard to pay $106.41 million over misleading statements about tax consequences affecting retail investors in its target-date retirement fund, according to a regulatory filing Friday.
The penalty highlights how fund company actions can create unexpected tax bills for retirement savers, potentially diminishing their long-term investment returns.
The SEC found that Vanguard’s failure to properly disclose these risks left investors facing substantial capital gains taxes they weren’t prepared for.
“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,” Vanguard said in an email statement.
The issue arose when Vanguard lowered the minimum investment requirement for its institutional target-date funds from $100 million to $5 million in December 2020, according to the SEC filing.
This change prompted many retirement plan investors to switch from the higher-cost investor share class fund to the lower-cost versions, according to the regulatory order.
To meet redemption demands from departing investors, Vanguard had to sell underlying assets in the investor share class funds, triggering capital gains that created tax liabilities for remaining shareholders, the SEC found.
The settlement includes $92.91 million in restitution to affected investors and a $13.5 million civil penalty, according to the SEC order.
The agency determined Vanguard’s fund prospectuses in 2020 and 2021 were “materially misleading” because they failed to disclose the potential for increased capital gains distributions from the share class switches, according to the filing.
The fine comes on top of a $40 million settlement Vanguard reached in a related investor class-action lawsuit, which will be added to the restitution fund if that settlement is terminated or rejected, the SEC said.
Multiple state regulators joined the SEC’s action, including the New York Attorney General’s office and securities regulators in Connecticut and New Jersey, according to the order.