It was ordered by the Securities Commission Vanguard to pay $106.41 million over misrepresentations about tax consequences affecting small investors in its target-date pension fund, according to regulatory filing Friday.
The penalty highlights how the actions of fund companies can create unexpected tax bills for pension savers, potentially reducing their long-term investment returns.
The SEC found that Vanguard’s failure to properly disclose these risks left investors facing significant capital gains taxes for which they were unprepared.
“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings. We are pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options,” Vanguard said in an emailed statement.
The problem arose when Vanguard lowered the minimum investment requirement for its target-date institutional funds from $100 million to $5 million in December 2020, according to an SEC filing.
The change prompted many pension plan investors to switch from higher-cost investor-class funds to lower-cost versions, according to the regulatory order.
To meet redemption requests from departing investors, Vanguard had to sell underlying assets in investor-class funds, triggering capital gains that created tax liabilities for remaining shareholders, the SEC found.
The settlement includes $92.91 million in restitution to aggrieved investors and a $13.5 million civil penalty, according to the SEC order.
The agency found that Vanguard’s 2020 and 2021 fund prospectuses were “materially misleading” because they failed to disclose the potential for increased capital gains distributions from the share class change, according to the filing.
The penalty comes on top of a $40 million settlement reached by Vanguard in a related investor class action lawsuit, which will be added to the damages fund if the settlement is terminated or rejected, the SEC said.
Multiple state regulators have joined the SEC action, including the New York Attorney General’s Office and securities regulators in Connecticut and New Jersey, according to the order.
