Vanguard to Pay $106.4 Million to Resolve Alleged Violations Linked to Retirement Funds

Vanguard Group, the world's largest mutual fund manager, has agreed to pay $106.4 million to settle charges related to misleading statements about capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts. The settlement, announced by the Securities and Exchange Commission (SEC) on January 19, 2025, resolves an investigation into Vanguard's actions following a December 2020 announcement that lowered the minimum initial investment amount for its Institutional Target Retirement Funds (Institutional TRFs) from $100 million to $5 million.

The SEC's order finds that Vanguard's announcement led to a substantial number of retirement plan investors redeeming their Investor TRFs and switching to the Institutional TRFs due to the latter funds' lower expenses. To meet the demand for these redemptions, the Investor TRFs had to sell underlying assets with gains, resulting in retail investors of the Investor TRFs facing historically larger capital gains distributions and tax liabilities. These investors were also deprived of the potential compounding growth of their investments.

The order also finds that Vanguard's prospectuses for its Investor TRFs, effective and distributed in 2020 and 2021, were materially misleading. They stated that the funds' distributions may be taxable as ordinary income or capital gains, and that capital gains distributions could vary considerably from year to year as a result of the funds' "normal" investment activities and cash flows. However, the prospectuses failed to disclose the potential for increased capital gains distributions resulting from the redemptions of fund shares by newly eligible investors switching from the Investor TRFs to the Institutional TRFs.

Vanguard agreed to be censured, cease and desist from future violations, and pay $18.2 million in disgorgement and prejudgment interest, a $13.5 million civil penalty, and additional relief ordered by the states' settlements, totaling $106.41 million to be distributed to affected investors through a Fair Fund. The settlement resolves the SEC's investigation along with settlements of parallel investigations of Vanguard announced today by the Office of the New York Attorney General (NYAG), the Connecticut Department of Banking, and the New Jersey Office of the Attorney General (NJAG) on behalf of the North American Securities Administrators Association (NASAA).

In a statement, Vanguard said it was pleased to settle the matter and is committed to supporting the more than 50 million everyday investors and retirement savers who entrust it with their savings. The settlement also resolves claims by a coalition of regulators in 43 U.S. states, Washington, D.C., and the U.S. Virgin Islands, led by the attorneys general of New York and New Jersey and the Connecticut Department of Banking.

The SEC's investigation was conducted by Mark Oh of the Home Office and Marie DeBonis of the Asset Management Unit, with assistance from Mark Dowdell and Andrea Dittert of the Division of Examinations, and supervised by Sarah Lamoree and Corey Schuster. The SEC appreciates the assistance of the NYAG's Investor Protection Bureau, Connecticut Department of Banking's Securities and Business Investments Division, NJAG's Bureau of Securities, and NASAA.

This settlement serves as a reminder to investment firms of the importance of providing accurate and complete information to investors, particularly regarding the potential risks and consequences associated with their investments.