Fund provider reaches multi-million dollar settlement over regulatory charges

Company accused of failing to warn investors of big tax bills

Fund provider reaches multi-million dollar settlement over regulatory charges

Vanguard Group has reached a US$6.25 million settlement to resolve charges it failed to warn many fund investors they would face surprisingly big tax bills, according to a Reuters report.

The settlement with Massachusetts Secretary of State William Galvin focused on Vanguard's target-date retirement funds, which contain mixes of stocks, bonds and cash that are designed to become less risky as investors age.

Problems reportedly arose after the company reduced the minimum investments in lower-cost funds designed for institutional investors to $5 million from $100 million in December 2020. This caused a flood of outflows from higher-cost funds, forcing them to sell securities and generate capital gains on which ordinary investors with taxable accounts owed taxes.

In one instance, the Vanguard Target Retirement 2040 Fund threw off 15.1% of its net asset value as capital gains in 2021, up from just 0.4% a year earlier.

"These extraordinary capital gains were caused by Vanguard's conscious decision to benefit ultra-wealthy shareholders over Main Street investors," Galvin said in a statement reported by Reuters.

Vanguard, which as of March had US$8.1 trillion in AUM, did not admit wrongdoing in agreeing to settle. The payout includes $5.5 million to reimburse Massachusetts investors holding more than 5,000 taxable accounts, plus $750,000 to the state.

"We are glad to put this matter behind us and avoid the cost and distraction of a protracted process," Vanguard said in a statement. "We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals."

Vanguard faces related class-action litigation in Philadelphia federal court brought on behalf of investors nationwide in its target-date funds.