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Target date funds are a way to invest in mutual funds that have preset dates for when they will be sold. Massachusetts is investigating the potential use of these funds as part of a fraud scheme.
Massachusetts is looking into several asset management firms for possible tax-disclosure concerns with target-date mutual funds.
The Securities Division of Secretary of the Commonwealth William Galvin addressed letters to Vanguard Group, Fidelity Investments, T. Rowe Price Group Inc., TROW -1.05 percent American Funds Distributors, and BlackRock Investments on Tuesday. The division is requesting information on client accounts and target-date mutual funds sold in the state, as well as any disclaimers, marketing materials, and educational materials that may be associated with such products.
Mr. Galvin’s office said the probe was launched when it learned of possible problems with target-date mutual funds, which are baskets of stocks, bonds, and cash that automatically grow more conservative as investors near retirement.
According to the Wall Street Journal, some individual investors who placed non-retirement money into Vanguard’s Target Date Retirement funds were struck with significant capital-gains distributions last month, which resulted in tax obligations.
Mr. Galvin’s office said in a statement that he is “especially concerned by stories of improperly reported fund adjustments that transferred financial obligations to small-dollar investors, resulting in substantial tax payments for individuals who maintained the funds in nonretirement accounts.”
Requests for comment from Vanguard, Fidelity, T. Rowe Price, and BlackRock BLK 1.49 percent were not immediately returned on Tuesday. A spokesperson for Capital Group, which owns American Funds, said the company had not yet received a letter from the Massachusetts Securities Division, but that it would send the needed information.
According to a Wall Street Journal investigation published last week, certain Vanguard Target Date Retirement fund owners received hefty capital-gains payouts, prompting huge tax obligations.
The Wall Street Journal’s RYAN COLLERD took this photo.
Target-date funds are designed for investors in 401(k)s and other tax-deferred retirement plans. They aren’t handled in such a way that dividends and capital gains are minimized. If they are maintained in a taxable account rather than a retirement plan, the holder will be responsible for paying taxes on the distributions, which may be higher than in other kinds of funds.
Because the Target Retirement method tries to decrease risk over time by automatically decreasing stock investments, Vanguard spokeswoman Carolyn Wegemann told the Journal last week that “these products are best served in a tax-deferred account.”
Few large asset managers, according to the Journal, explicitly specify which of their assets should be maintained in a taxed account. The main site of Vanguard.com’s Target Retirement funds do not inform investors that the products are not suitable for taxable accounts.
“Investors need to be aware of the dangers involved, as well as the potential tax obligations,” Mr. Galvin said, “and I want to make sure institutions are being transparent about these risks.”
Talal Ansari can be reached at [email protected]
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The “vanguard target retirement funds review” is a news article that discusses the Massachusetts Attorney General’s office investigating potential violations of the state’s securities laws by Vanguard Group.
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