Vanguard fined more than $100 million by SEC over violations involving target date retirement funds

The Securities and Exchange Commission made an announcement on Friday regarding disclosures around target date investment funds.

The problems started from a 2020 change where Vanguard reduced the minimum investment requirement for its institutional target date funds. The SEC ruling stated that this change led to redemptions as Vanguard customers moved from other target date funds into the institutional versions, causing taxable distributions for some of the remaining investors. The SEC stated that Vanguard did not sufficiently disclose the potential impact on distributions of the investment threshold changes.

The order rules that as a result, retail investors in the Investor TRFs who didn’t opt to switch and instead remained invested in taxable accounts faced historically higher capital gains distributions and tax obligations and missed out on the potential growth of their investments.

Vanguard will pay $106.41 million to affected investors, according to the SEC. Compensation was agreed to without Vanguard admitting to or denying the SEC’s findings.

Vanguard is one of the world’s largest asset managers, reporting more than $10 trillion of 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.

We’re dedicated to helping the over 50 million individual investors and retirees who put their trust in us to secure their financial futures. We’re happy to have reached this agreement and look forward to continuing to provide top-notch investment options for our investors.

The example illustrates how investors can receive significant tax bills even if they don’t sell any investments during a specific year. When Vanguard reduced the initial investment minimum for its institutional target retirement funds from $100 million to $5 million in December 2020, it led to a number of retirement plan investors closing out their accounts in the investor share class of these funds and moving to the institutional version, according to the Securities and Exchange Commission.

If they hold the fund in a brokerage account subject to taxation, they would have followed the order.

Target date funds typically stay in tax-deferred accounts like 401(k) plans or individual retirement accounts, which would otherwise trigger a tax liability from a big payout of capital gains.

The fine announced Friday is in addition to a $40 million settlement that Vanguard agreed to pay to investors as part of a class action lawsuit.

The timing of the target date fund changes is similar to another recent issue Vanguard faced. In 2023, Vanguard was fined $800,000 by the Financial Industry Regulatory Authority relating to issues with account statements for money market funds in 2019 and 2020.

The alleged wrongdoing occurred under the tenure of former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard in 2024, coming from BlackRock.