Multistate Task Force Resolves Unanticipated Tax Bills in Some Target Date Retirement Funds

TRENTON – The Office of the Attorney General, the Division of Consumer Affairs, and the Bureau of Securities announced today that the State has joined a task force of state securities regulators and the U.S. Securities and Exchange Commission (SEC) in a $106 million settlement with Vanguard Marketing Corporation (VMC) and The Vanguard Group, Inc. (collectively known as Vanguard), for failing to supervise certain registered persons and failing to disclose potential tax consequences to investors following a change in investment minimums for certain target date retirement funds.

The settlement stems from a three-year multistate task force investigation coordinated through the North American Securities Administrators Association’s (NASAA) Enforcement Section Committee, co-led by New Jersey, Connecticut, and New York. The NASAA investigation ran parallel to a concurrent investigation by the SEC.

Before the products merged in 2022, Vanguard offered and sold two types of Target Retirement Funds (TRFs): Institutional TRFs and Investor TRFs. Prior to December 2020, the investment minimum for Institutional TRFs was $100 million and the investment minimum for Investor TRFs was $1,000. In December 2020, Vanguard lowered the investment minimums for its Institutional TRFs from $100 million to $5 million. As a result of the lowered investment minimums, a large number of retirement plan investors redeemed their Investor TRF shares to purchase Institutional TRF shares. The large number of redemptions caused Vanguard to sell highly appreciated assets in the Investor TRFs, which triggered significant capital gains taxes for hundreds of thousands of retail investors who remained invested in the Investor TRFs.

Vanguard did not disclose the potential capital gains and tax implications, which were a consequence of the migration of shareholders from the Investor TRF to the Institutional TRF, to Investor TRF shareholders.

Target date funds are designed to be long-term investments for individuals with specific retirement dates in mind.

The SEC will use its Fair Fund program to compensate investors for the capital gains taxes.

“I’m pleased that states and the federal government were able to work cooperatively on this issue to bring restitution for retail investors,” said First Assistant Attorney General Lyndsay V. Ruotolo. “Our regulators work tirelessly to make sure that firms are prioritizing the financial wellbeing of their customers and adhering to the law.”

“Deciding how to invest for retirement is one of the most consequential financial choices a person can make,” said Cari Fais, Director of the Division of Consumer Affairs. “Investors deserve full disclosure of investment risks when entrusting their investments to the management of others.”

“Target date retirement funds are often promoted for their simplicity and convenience for the small investor, and the last thing these investors would expect is a large tax bill,” said Elizabeth M. Harris, Bureau Chief of the Bureau of Securities. “We are pleased that we are able to return hard-earned money to New Jersey investors affected by Vanguard’s lack of disclosure.”

This is the second settlement for New Jersey investors announced this month. Last week, the State joined a $17 million nationwide multistate settlement with Edward D. Jones & Co., L.P. resulting from a probe into the broker-dealer’s supervision of financial professionals moving customers’ commission-based brokerage accounts to fee-based investment advisory accounts.

Vanguard Group, Inc. is an SEC-registered investment adviser and is the parent company of VMC, a FINRA- and state-registered broker-dealer. Vanguard markets and sells target retirement funds to investors who hold shares in qualified accounts that offer special tax treatment, including deferred taxes, as well as to investors who hold shares in taxable accounts. Historically, the amount of capital gains distributions and resulting tax liability for shareholders in Investor TRFs has been modest. Throughout this investigation, Vanguard has not admitted or denied any wrongdoing.

In addition to New Jersey, Connecticut, and New York, the following NASAA jurisdictions are signatories to the term sheet: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

The Bureau’s investigation was handled by Supervising Investigator Myles Orosco and Investigators Vincent Napoli and Perry Traina of the Bureau of Securities, within the Division of Consumer Affairs.

***

The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. The Bureau encourages investors to “Check Before You Invest” by obtaining information, including the registration status and disciplinary history, of any financial professional doing business in or from New Jersey. Investors should contact the Bureau toll-free within New Jersey at 1-866-I-Invest (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau’s website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance, or to raise issues or complaints about New Jersey-based financial professionals or investments.

###