Vanguard to pay $106 million in SEC accord after saddling investors with big tax bills

By Chris Prentice and Jonathan Stempel

(Reuters) – Vanguard Group will pay $106.4 million to settle allegations by the U.S. Securities and Exchange Commission that it failed to disclose key tax information about its popular target-date funds, leaving hundreds of thousands of ordinary investors stuck with inflated with taxes.

The settlement stemmed from Vanguard’s December 2020 decision to raise the minimum investment in low-cost fund classes for institutional clients from $100 million to $5 million.

This caused many investors who qualified for these funds to move out of the more expensive retail fund classes.

The SEC said the retail funds then had to sell assets to meet repayments and pass on a large capital gains tax burden to remaining investors.

While Vanguard warned investors in target funds that their tax burden could change from year to year, it did not warn of that risk when investors moved from retail funds to institutional funds, the SEC said.

Vanguard’s target date funds contain a mix of stocks, bonds and cash funds designed to become less risky as investors age.They are also designed to be tax efficient.

The settlement includes $92.9 million in restitution, plus a $13.5 million civil penalty.Avangard did not admit or deny wrongdoing in agreeing to the settlement.

“Materially accurate information about capital gains and tax consequences is critical to investors saving for their retirement,” Corey Schuster, chief of the asset management division of the SEC’s enforcement division, said in a statement.

In a statement, Vanguard said it is pleased to reach the agreement and is “committed to supporting the more than 50 million everyday investors and retirement savers who trust us with their savings.”

The settlement also resolved claims by a coalition of regulators from 43 US states, Washington 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 by fund investors.It also agreed to pay $6.25 million in July 2022 to settle similar claims by Massachusetts Secretary of State William Galvin.

The Valley Forge, Pennsylvania-based company had $10.4 trillion in assets as of Nov. 30, 2024.

(Reporting by Chris Prentice and Jonathan Stempel Editing by Aurora Ellis)