New York Attorney General Letitia James and a bipartisan, multistate coalition of 45 securities regulators, together with the Securities and Exchange Commission (SEC), today secured $106 million from Vanguard Group, Inc., an investment advisory firm, and its subsidiary Vanguard Marketing Corporation. The settlement follows Vanguard’s failure to notify investors of changes to its retirement funds that resulted in higher capital gains tax bills for hundreds of thousands of investors. An investigation by the Office of the Attorney General (OAG) found that Vanguard lowered the minimum requirements on one of its retirement funds without telling investors that the changes would result in higher tax bills. More than 15,000 New York investors were forced to pay capital gains taxes on their retirement accounts that were exponentially higher because of those undisclosed changes. As a result of today’s settlement with the bipartisan coalition led by New York, Connecticut, New Jersey, and the SEC, Vanguard will pay $106 million in restitution to hundreds of thousands of investors.
“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,” said Attorney General James. “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. New Yorkers deserve to retire in comfort and dignity, and that means ensuring their lifetime of hard work and earnings are protected.”
Vanguard is one of the largest investment advisors in the world, with approximately $7.9 trillion in retirement savings under its management. Vanguard offered investors “target date” retirement funds, known as Investor Target Date Retirement Funds (TRFs) and Institutional Target Date Retirement Funds. Both Vanguard Investor and Institutional TRFs were structured and invested according to a “target date” of the approximate year that an investor planned to retire. The main differences between Vanguard’s Investor TRFs and its Institutional TRFs were the fund fees and expenses, and the minimum investment amounts to invest in the TRFs. The Investor TRFs were slightly more expensive to manage but had a minimum $1,000 investment amount, whereas the Institutional TRFs were cheaper to manage but had a $100 million minimum investment requirement.
In December 2020, Vanguard changed the minimum amount required to invest in its Institutional TRFs from $100 million to $5 million. As a result of the lowered investment minimums, many people sold their Investor TRF shares to purchase Institutional TRF shares. The large number of sales caused Vanguard to sell highly appreciated assets in the Investor TRFs, which resulted in significant capital gains taxes for hundreds of thousands of retail investors who relied on the Investor TRFs. Vanguard did not disclose potential capital gains tax consequences to Investor TRF shareholders as a result of the migration of shareholders from the Investor TRFs to the Institutional TRFs.
The OAG investigation found that Vanguard organized a working group to study the impact of these changes and knew that investors would likely be responsible for paying taxes on the increased value of their accounts but failed to inform investors of those consequences.
Today’s settlement requires Vanguard to pay $106 million into a fair fund managed by the SEC to distribute as restitution to impacted investors. Investors eligible for restitution will be contacted by the SEC.
Forty-five jurisdictions are signatories to the term sheet for the settlement: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia, Wisconsin, Wyoming, the District of Columbia, and the U.S. Virgin Islands.
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