Why Vanguard Was Ordered to Pay a $106 Million Fine Related to Target-Date Funds
Vanguard's fine centers on December 2020 actions related to the asset manager's target-date funds and capital gains taxes. Here's what you need to know.
The Securities and Exchange Commission (SEC) announced Friday that The Vanguard Group, one of the world's biggest asset managers, will pay a $106.4 million fine to settle charges for "misleading statements related to capital gains distributions and tax consequences" for individuals that invested in its Vanguard Investor Target Retirement Funds (TRF) in taxable accounts.
The SEC found that in December 2020, Vanguard lowered the minimum investment for its lower-expense Institutional TRFs, to $5 million from $100 million. This prompted many retirement plan investors to sell shares of the Investor TRFs and switch to institutional target-date funds.
However, this triggered capital gains taxes for those sellers. Furthermore, retail investors who remained in the Investor TRFs faced larger capital gains distributions and tax liabilities and missed out on potential growth.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements," said Corey Schuster, chief of the Division of Enforcement's asset management unit, in a statement. "Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments."
Vanguard agreed to the $106.4 million in penalties and relief to affected investors without admitting or denying the allegations. This is in addition to a $40 million settlement it agreed to pay to settle a class action lawsuit.
What is a target-date fund?
As Kiplinger contributor and investment adviser representative Tony Drake, CFP, explains in his piece on "Is a Target-Date Fund Right for You?," target-date funds "are mutual funds, based on the year the saver plans to retire.
"The target-date fund is actively managed for the rest of your life, rebalancing to adjust risk as you get older and closer to retirement," Drake explains. However, there are several factors to consider when selecting a target-date fund, including diversification, fees, risk and asset allocation, he writes.
If you're in the market for a target-date fund or just want to know what your options are, here are six target-date funds to buy for your retirement, courtesy of Nellie Huang, senior associate editor of Kiplinger Personal Finance Magazine.
Related Content
-
Holiday Tax Scams: 'Tis the Season to be WaryTax Scams Navigating tax tricks of the holiday season may be daunting, but don't let that destroy your festive spirit
-
Metro by T-Mobile Is Giving Away This Samsung Galaxy A16: Which Plans Are Eligible?Metro by T-Mobile is offering free Samsung Galaxy A16 phones on eligible plans right now. Here’s how the deal works.
-
I Drive and Collect Classic Cars: Here’s How I Got StartedAre classic cars a hobby or an investment strategy — or both? Either way, the vintage car scene is much cooler and more affordable than you think.
-
I Drive and Collect Classic Cars: Here’s How I Got in the Game Without Spending a Fortune
Are classic cars a hobby or an investment strategy — or both? Either way, the vintage car scene is much cooler and more affordable than you think.
-
The $183,000 RMD Shock: Why Roth Conversions in Your 70s Can Be RiskyConverting retirement funds to a Roth is a smart strategy for many, but the older you are, the less time you have to recover the tax bite from the conversion.
-
A Financial Pro Breaks Retirement Planning Into 5 Manageable PiecesThis retirement plan focuses on five key areas — income generation, tax management, asset withdrawals, planning for big expenses and health care, and legacy.
-
4 Financial To-Dos to Finish 2025 Strong and Start 2026 on Solid GroundDon't overlook these important year-end check-ins. Missed opportunities and avoidable mistakes could end up costing you if you're not paying attention.
-
Are You Putting Yourself Last? The Cost Could Be Your Retirement SecurityIf you're part of the sandwich generation, it's critical that you don't let the needs of your aging parents come at the expense of your future.
-
The Retirement Donor's Checklist: Key Deadlines by Gift TypeRetirees have some charitable contribution options that can help avoid spikes in income from RMDS and capital gains.
-
I'm 73, Retired, and Dreading Winter, But I Can't Afford to Be a Snowbird. Help!How can a snowbird wannabe warm up without the expense? We asked professional wealth planners for advice.
-
5 Smart Things to Do With Your Year-End Bonus, From a Financial ProfessionalAfter you indulge your urge to splurge on a treat, consider doing adult things with the extra cash, like paying down debt, but also setting up a "fun fund."
