Compliance

Self-Dealing Suit Against Wells Fargo Dismissed

A U.S. District Court Judge agreed with Wells Fargo that allegations that the bank breached its fiduciary duty by continuing to invest in its own TDFs when better-performing funds were available at a lower cost are insufficient to plausibly allege a breach of fiduciary duty.

By Rebecca Moore editors@plansponsor.com | May 31, 2017
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A federal district court judge has granted Wells Fargo’s motion to dismiss a lawsuit accusing it of self-dealing and imprudent investing of its own 401(k) plan’s assets by funneling billions of dollars of those assets into Wells Fargo’s proprietary target-date funds (TDFs).

John Meiners filed the lawsuit last November, also accusing Wells Fargo of using a quick enroll option which defaulted participants into the TDFs to seed the funds and make more money. According to the complaint, Wells Fargo “double charged for its target-date funds—charging fees for both managing the target-date funds themselves, and managing the index funds underlying the target-date funds.”

However, U.S. District Court Judge David S. Doty of the U.S. District Court for the District of Minnesota agreed with Wells Fargo that Meiners’ allegations that the bank breached its fiduciary duty by continuing to invest in its own TDFs when better-performing funds were available at a lower cost are insufficient to plausibly allege a breach of fiduciary duty.

Central to Meiners’ complaint is the allegation that the Wells Fargo funds consistently underperformed Vanguard funds. “In order to plausibly allege a fund is underperforming, Meiners must provide some benchmark against which the Wells Fargo funds can meaningfully be compared,” Doty wrote in his opinion.

He noted that the only benchmark Meiners provides is the Vanguard funds’ performance. However, citing Tussey v. ABB, Inc., Doty said a comparison of the returns for two different funds is insufficient because “funds ... designed for different purposes ... choose their investments differently, so there is no reason to expect them to make similar returns over any given span of time.” Doty added that one would expect the Wells Fargo and Vanguard funds to perform differently because the Wells Fargo funds have a different investment strategy than the Vanguard funds. Specifically, Wells Fargo funds have a higher allocation of bond than Vanguard funds. “Therefore, it does not necessarily follow that the Wells Fargo funds were substandard compared to the Vanguard funds, nor does it follow that Wells Fargo’s decision making process was flawed,” he concluded.

NEXT: Fees and seeding the TDFs

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