By Chris Prentice and Jonathan Stempel
(Reuters) – Vanguard Group will pay $106.4 million to settle U.S. Securities and Exchange Commission charges that it failed to disclose important tax information about its popular target date funds, leading to hundreds of thousands of ordinary investors getting stuck with bills inflated tax.
The settlement stemmed from Vanguard's decision in December 2020 to reduce the minimum investment in lower-cost fund classes for institutional clients to $5 million from $100 million.
This led many investors who qualified for those funds to move from higher cost retail fund classes.
The SEC said the retail funds were then forced to sell assets to satisfy redemptions, and pass on large capital gains tax burdens to the remaining investors.
Although Vanguard warned target date fund investors that their tax burdens could change from year to year, it did not warn of that risk for when investors moved to institutional funds from retail funds, the SEC said.
Vanguard's target date funds contain mixes of stocks, bonds and cash that are designed to become less risky as investors age. They are also designed to be tax efficient.
The payment includes restitution of $92.9 million, plus a civil penalty of $13.5 million. Vanguard neither admitted nor denied wrongdoing in agreeing to settle.
“Relevant and accurate information about capital gains and tax implications is essential for investors saving for their retirement,” Corey Schuster, head of the SEC's enforcement division's asset management unit, said in a statement.
In a statement, Vanguard said it was pleased to settle, and “is committed to supporting the more than 50 million everyday investors and retirement savers who entrust their savings to us.”
The settlement also resolved claims by a coalition of regulators in 43 US states, Washington, DC 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 by fund investors. It also agreed to pay $6.25 million in July 2022 to resolve similar claims by Massachusetts Secretary of State William Galvin.
The Valley Forge, a Pennsylvania company, had $10.4 trillion in assets under management as of November 30, 2024.
(Reporting by Chris Prentice and Jonathan Stempel; Editing by Aurora Ellis)