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MANHATTAN (CN) — Asset management firm Vanguard has agreed to pay more than $106 million to settle ongoing probes by the U.S. Securities and Exchange Commission and several state attorneys general into the group’s retirement fund disclosures, the firm confirmed on Friday.
The $106.41 million penalty will be paid out to hundreds of thousands of investors, whom investigators say Vanguard failed to adequately inform of a critical change to its retirement funds.
That change occurred in 2020, when Vanguard lowered the initial investment amount of its Institutional Target Retirement Funds (TRFs), prompting a “substantial number” of retirement plan investors to switch from their Investor Target Retirement Fund to an institutional one for its lower management expenses, according to the SEC.
Both Vanguard’s Investor TRFs and Institutional TRFs are types of target date investment funds, a popular retirement portfolio that takes higher risks when the investor is young and gets more conservative as they approach retirement age.
The difference between the two TRFs lies in the investment amounts and expenses. Investor TRFs had higher management fees but a minimum investment amount of just $1,000. Institutional TRFs, meanwhile, had lower management fees but a $100 million minimum investment requirement — that is, until 2020, when Vanguard slashed it to $5 million.
The consequences of that change were not adequately disclosed to investors, according to the SEC, causing harm to the hundreds of thousands of investors who relied on the Investor TRFs.
“To meet the demand for these redemptions, the Investor TRFs had to sell underlying assets with gains due to the rising financial markets that had rebounded from pandemic lows,” the SEC wrote in a Friday press release. “The order finds that, as a result, retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of the potential compounding growth of their investments.”
With approximately $7.9 trillion in retirement savings under its management, Vanguard is one of the world’s largest asset managers to offer this type of portfolio.
“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings,” a firm spokesperson said in a statement to Courthouse News. “We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options.”
Per the SEC’s order, Vanguard did not admit or deny the regulator’s findings that it violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act.
“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, chief of the SEC’s Division of Enforcement’s Asset Management Unit. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”
Friday’s settlement resolves the SEC’s probe into Vanguard, as well as parallel investigations into the company by the New York Attorney General, the Connecticut Department of Banking and the New Jersey Attorney General on behalf of the North American Securities Administrators Association.
“New Yorkers deserve the peace of mind that when they rely on trained professionals to help them save for retirement, those professionals won’t end up costing them extra money,” New York Attorney General Letitia James said in a statement Friday. “People pay Vanguard to help manage and safeguard their retirement funds, but instead these investors were left in the dark about changes that forced them to pay thousands of extra dollars.
“Today, my office along with a coalition of states and the SEC is holding Vanguard accountable for misleading hundreds of thousands of people nationwide,” James added. “New Yorkers deserve to retire in comfort and dignity, and that means ensuring their lifetime of hard work and earnings are protected.”
In total, 45 jurisdictions are signatories to the settlement’s term sheet, including 43 states, the District of Columbia and the U.S. Virgin Islands.
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