Without admitting or denying allegations of a slip-up that saddled thousands of target date fund investors with huge tax bills, Vanguard agreed to pay millions of dollars in restitution and a fine.
Vanguard Marketing, whose parent and affiliates make up one of the largest asset managers at $8 trillion in assets under management, will pay $6.25 million to settle the Massachusetts Securities Division’s charges. The state alleged that Vanguard’s opening of institutional funds to more investors left the remainder with “higher than usual” capital gains distributions and taxes. The July 6 settlement, which followed
“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultrawealthy shareholders over Main Street investors,” Massachusetts Commonwealth Secretary William Galvin said in a statement. “Firms should be putting retail investors first when making management decisions, and Vanguard failed to do that in this case.”
The case highlights a concern among some financial advisors and other experts about the potential shortcomings of TDFs. Critics say the funds, which focus on maximizing returns for a date years or decades into the future, can sometimes be examples of “
In this case, more than 5,000 investors in the state using TDFs in non-retirement, taxable accounts absorbed as much as hundreds of thousands of dollars in capital gains from redemptions after what the Journal’s Jason Zweig called “an elephant stampede” of newly eligible investors to the identical, but cheaper, institutional products. Investors sold shares to convert them, and the retail-facing funds shed holdings due to the lower base. The ensuing revenue from the sales generated capital gains tied to the hefty and unexpected tax bills.
Investigators say that in December of 2020, Vanguard flubbed when it lowered the required minimum investment for institutional TDFs to $5 million from $100 million, according to Daniel Wiener, chairman of Newton, Massachusetts-based Adviser Investments and editor of
“Why they didn’t do that, they have never said,” Wiener said in an email. “They tried to place the blame on investors, rather than taking the blame themselves, by insinuating that they’ve always said that target funds are only for use in tax-deferred accounts like 401ks and IRAs. This is absurd given that they never explicitly told investors not to invest in target funds outside of tax-deferred accounts, nor did they close off the funds to non-deferred accounts.”
The firm is “glad to put this matter behind us and avoid the cost and distraction of a protracted process,” Vanguard spokeswoman Emily Farrell said in a statement.
“As a client-owned organization, Vanguard has a long history of lowering costs and investment minimums to benefit investors and retirement savers,” she said. “We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals.”
It’s not clear whether posts on the
Vanguard “surely had a duty to warn their investors that they could have an increased tax liability because of Vanguard’s action,” Galvin told the Journal in its “news exclusive”
Investors may receive up to 65% of their tax bills, Galvin told the publication. The settlement requires $5.5 million in restitution payments to as many as 5,553 accounts and a one-time payment of $500,000 to cover the cost of the regulator’s investigation. In addition, Vanguard agreed to pay $250,000 to administer the tax payments to eligible investors. Anything left over from the restitution will go toward the state’s Worker and Small Investor Protection Fund.
