Vanguard will pay more than $6 million to settle an investigation by Massachusetts Commonwealth Secretary William Galvin’s office into several of its target-date funds that allegedly left thousands of retail investors holding taxable capital gains.
The settlement comes after Galvin’s office opened an investigation earlier this year into Vanguard and several other broker/dealers.
As a part of the settlement, Vanguard will establish a $5.5 million fund to pay restitution to harmed investors (and spending $200,000 to run it), while paying a one-time fine of $500,000 to the Bay State.
Target-date funds typically tilt their portfolios toward more conservative allocations as the “target” date of the fund nears, and they’re generally considered a hands-off investment. In December 2020, Vanguard announced it would lower the investment minimum for its institutional target-date funds from $100 million to $5 million, according to Galvin. In response, many retirement plans with more than $5 million switched from standard target-date fund options to institutional versions.
But doing so left the standard funds with capital gain taxes that had to be distributed among those remaining investors, including some smaller investors who held the funds in taxable accounts. The investigation into Vanguard’s conduct found that long and short-term capital gains were distributed in more than 5,000 accounts in the state, affecting thousands of investors.
In a statement, Galvin said he was pleased his office could get “meaningful relief” for investors.
“These extraordinary capital gains were caused by Vanguard’s conscious decision to benefit ultra-wealthy shareholders over Main Street investors,” Galvin said. “Firms should be putting retail investors first when making management decisions, and Vanguard failed to do that in this case.”
"We are glad to put this matter behind us and avoid the cost and distraction of a protracted process," according to a statement from Vanguard. "As a client-owned organization, Vanguard has a long history of lowering costs and investment minimums to benefit investors and retirement savers. We remain committed to reducing the cost and complexity of investing to help more Americans reach their financial goals."
In January, Galvin sent letters to Vanguard, as well as Fidelity Brokerage Services, T. Rowe Price Investment Services, American Fund Distributors and BlackRock inquiring about their actions concerning target-date funds. Investigations into the four other firms are ongoing, according to Galvin’s office.
Money left over from the Vanguard fund will be distributed into the state’s Worker and Small Investor Protection Fund, according to the secretary’s office.