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Why Vanguard Took a $106M SEC Fine For Lowering Its Minimums

The SEC charged the asset manager with misleading clients over changes to its retirement funds, leading to higher tax bills for investors.

Photo of the Securities and Exchange Commission building
Photo by Krblokhin via iStock

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How much was the bill?

Vanguard agreed to pay $106.4 million for allegedly misleading and failing to notify clients of changes to its retirement funds, which eventually led to much higher capital gains tax bills for hundreds of thousands of retail investors. The Malvern, Pennsylvania-based firm also agreed to pay $40 million in a separate investor class-action lawsuit. While the world’s second-largest asset manager neither admitted nor denied the findings, the money will be distributed back to harmed investors, according to a release.

The fine  was one of the larger ones handed down to a single firm in recent months. “We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options,” the company said in a statement.

Saving for Retirement

Transparency is big for regulators, and if financial firms aren’t upfront about how their products work, they risk facing lofty fines. That’s exactly where Vanguard found itself last week. 

Rewind to December 2020 when Vanguard lowered the minimum amount required to invest in its Institutional Targeted Retirement Funds from $100 million to just $5 million. Seems like a win for investors, right? But as a result, many customers began selling their Investor TRFs and switching to the Institutional TRFs, which had lower expenses. That forced the Investor TRF to sell underlying assets with gains from the recent stock market run, leading to historically high tax bills.

Always the Last to Know. The Securities and Exchange Commission said Vanguard failed to properly notify all investors of the changes, and those who didn’t make the switch paid the price, literally. In New York alone, more than 15,000 investors were forced to pay capital gains taxes on their retirement accounts that were exponentially higher because of the undisclosed changes, according to the state’s attorney general.

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” the SEC’s Corey Schuster said in the release.