Vanguard Faces $106 Million Penalty as Attorney General James Uncovers Retirement Fund Notification Failures

NEW YORK – New York Attorney General Letitia James, along with a bipartisan, multistate coalition of 45 securities regulators and the Securities and Exchange Commission (SEC), has today secured $106 million from Vanguard Group, Inc., an investment advisory firm, along with its subsidiary Vanguard Marketing Corporation. This settlement is due to Vanguard’s omission in notifying investors about alterations to its retirement funds that resulted in increased capital gains tax obligations for hundreds of thousands of investors. An inquiry conducted by the Office of the Attorney General (OAG) revealed that Vanguard had reduced the minimum requirements on one of its retirement funds without informing investors that these alterations would lead to greater tax liabilities. Over 15,000 New York investors faced capital gains taxes on their retirement accounts that were far higher because of these undisclosed changes. Consequently, due to today’s agreement with the bipartisan coalition led by New York, Connecticut, New Jersey, and the SEC, Vanguard will disburse $106 million in restitution to hundreds of thousands of investors.

“New Yorkers are entitled to the assurance that when they trust qualified professionals to assist them in saving for retirement, those professionals won’t inadvertently incur additional costs for them,” stated Attorney General James. “Individuals engage Vanguard to aid in managing and protecting their retirement funds, yet these investors were left uninformed about changes that compelled them to pay thousands in added costs. Today, my office, together with a coalition of states and the SEC, is holding Vanguard responsible for misleading countless individuals across the nation. New Yorkers deserve to retire comfortably and with respect, which necessitates safeguarding their hard-earned income and savings.”

Vanguard stands as one of the predominant investment advisors globally, overseeing nearly $7.9 trillion in retirement savings. Vanguard provided investors with “target date” retirement funds, referred to as Investor Target Date Retirement Funds (TRFs) and Institutional Target Date Retirement Funds. Both types of TRFs were organized and invested according to a “target date” aligned with the approximate year an investor intended to retire. The primary distinctions between Vanguard’s Investor TRFs and their Institutional counterparts lay in the fund charges and expenses, alongside the minimum amounts required for investment in the TRFs. The Investor TRFs had a slightly higher management cost but required a minimum investment of $1,000, whereas the Institutional TRFs were less expensive to manage but necessitated a $100 million minimum investment threshold.

In December 2020, Vanguard amended the minimum investment requirement for its Institutional TRFs from $100 million to $5 million. The decrease in investment minimums prompted many individuals to divest their shares in Investor TRFs to acquire shares in Institutional TRFs. This significant volume of sales compelled Vanguard to liquidate highly appreciated assets within the Investor TRFs, resulting in considerable capital gains tax burdens for numerous retail investors reliant on the Investor TRFs. Vanguard did not provide disclosures regarding possible capital gains tax effects to Investor TRF shareholders stemming from the transition of shareholders from Investor TRFs to Institutional TRFs.

The OAG inquiry disclosed that Vanguard had convened a working group to assess the impacts of these modifications and was aware that investors would likely be liable for taxes on the increased worth of their accounts, yet failed to notify investors about these repercussions.

The settlement announced today mandates Vanguard to remit $106 million into a fair fund administered by the SEC, intended to provide restitution to affected investors. Investors eligible for restitution will be notified by the SEC.

Forty-five jurisdictions have signed 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.

The OAG investigation was carried out by Senior Enforcement Counsel Hannah K. Flamenbaum, along with Assistant Attorneys General Melissa Gable and Stephanie Torre, in collaboration with Legal Assistants Natalya Fadeyeva and with assistance from Principal Accountant Shalendra Ramadhin and former law interns Alex MacDonald and Greg Zaffino, under the guidance of Investor Protection Bureau Chief Shamiso Maswoswe and Deputy Bureau Chief Kenneth Haim. Data Scientist Gautam Sisodia and Senior Data Analyst Akram Hasanov provided additional support under the direction of Director Victoria Kahn, all from the Research and Analytics Unit. The Investor Protection Bureau operates under the Division of Economic Justice, led by Chief Deputy Attorney General Chris D’Angelo and overseen by First Deputy Attorney General Jennifer Levy.