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.
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"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.
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