Massachusetts is investigating some asset-management companies over potential tax-disclosure issues related to target-date mutual fund offerings.
Secretary of the Commonwealth William Galvin said Tuesday his office’s Securities Division sent letters to Vanguard Group, Fidelity Investments, T. Rowe Price Group Inc., TROW -1.05% American Funds Distributors and BlackRock Investments. The division is asking the companies for information related to client accounts and target-date mutual funds offered in the state, and any disclosures, marketing materials and educational materials offered with those funds.
Mr. Galvin’s office said the investigation was initiated after it was made aware of potential issues with target-date mutual funds—bundles of stocks, bonds and cash that automatically become more conservative as investors approach their retirement.
The Wall Street Journal reported on Friday that some individual investors who put nonretirement money in Vanguard’s Target Date Retirement funds got hit last month with large capital-gains distributions, which triggered tax bills.
Mr. Galvin is “particularly concerned by reports of inadequately disclosed fund changes that shifted financial burdens to small-dollar investors, resulting in large tax bills for those who held the funds in nonretirement accounts,” his office said in a statement.
Vanguard, T. Rowe Price and BlackRock BLK 1.49% didn’t respond to requests for comment Tuesday. A spokeswoman for Capital Group, home to American Funds, said it hadn’t yet received a letter from the Massachusetts Securities Division, but will provide the information requested. A spokesman for Fidelity declined to comment.
Some investors in Vanguard’s Target Date Retirement funds were hit with large capital-gains distributions, triggering big tax bills, according to a Wall Street Journal report last week.
Photo: RYAN COLLERD for The Wall Street Journal
Target-date funds are tailored for investors in 401(k)s or other retirement plans where taxes are deferred. They aren’t managed to minimize dividends or capital gains. If they are held in a taxable account instead of a retirement plan, the holder will owe taxes on those payouts—amounts that sometimes could be greater than in other types of funds.
Vanguard spokeswoman Carolyn Wegemann told the Journal in last week’s article that because the Target Retirement approach seeks to reduce risk over time by automatically trimming stock positions, “these funds are best served in a tax-deferred account.”
The Journal found that few leading asset managers clearly and simply state which of their funds should be held in a taxable account. The Target Retirement funds’ main pages at Vanguard.com don’t tell investors that the funds aren’t ideal for taxable accounts.
“Investors need to be made aware of the risks involved and the tax liabilities they could face in certain circumstances,” Mr. Galvin said, “and I want to make sure institutions are being upfront about these risks.”
Write to Talal Ansari at [email protected]
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