New Lawsuit Accuses Wells Fargo 401(k) Plan Fiduciaries of Self-Dealing

Motives behind keeping higher cost, underperforming funds in plan alleged in the lawsuit include providing seed money for Wells Fargo to launch new fund products.

A proposed class action lawsuit has been filed against alleged fiduciaries of the Wells Fargo & Co. 401(k) plan alleging violations of Employee Retirement Income Security Act (ERISA) fiduciary duty and prohibited transaction provisions.

The complaint says that as of December 31, 2018, the plan had approximately $40 billion in assets and 344,287 participants, making it one of the largest defined contribution (DC) retirement plans in the country. “Combined with the investment sophistication of all the plan fiduciaries and their unique access to information, the plan and its fiduciaries have enormous bargaining power to receive superior investment products and services at extraordinarily low cost,” it states.

But the plaintiff says the retirement plan committee defendants failed to satisfy threshold procedural norms needed for a non-conflicted fiduciary to satisfy its duties of loyalty and prudence under ERISA. According to the complaint, the committee defendants selected and retained Wells Fargo products over materially identical, yet cheaper, non-proprietary alternatives; selected Wells Fargo products that had no performance history that could form the basis of a fiduciary’s objective decision-making process; and failed to remove proprietary funds despite sustained underperformance.

The plaintiff alleges that the committee defendants’ actions all served Wells Fargo’s interests, as the selection of proprietary investments for the plan provided earned Wells Fargo money, supported its asset management business and/or provided seed money for Wells Fargo to launch new fund products.

For example, the complaint says that upon the creation of the Wells Fargo/State Street Target CITs (Target Date CITs) in 2016, the committee defendants added the Target Date CITs to the plan even though the funds had no prior performance history or track record which could demonstrate that they were prudent. Despite the lack of a track record, the committee defendants “mapped” nearly $5 billion of participant retirement savings from the plan’s previous target-date option into the Target Date CITs.

The complaint notes that the Department of Labor (DOL) has advised that, “[i]n general, plan fiduciaries should engage in an objective process to obtain information that will enable them to evaluate the prudence of any investment option made available under the plan. For example, in selecting a TDF [target-date fund] you should consider prospectus information, such as information about performance (investment returns) and investment fees and expenses.” The complaint says, “The committee defendants plainly did not (and necessarily could not) meet this threshold standard, because no ‘information about performance’ existed for the brand new Target Date CITs.” The plaintiff suggests that at a minimum, a prudent fiduciary process requires a three-year performance history for an investment option prior to its inclusion in a plan.

The Target Date CITs invest the plan’s assets into other Wells Fargo funds, also collective investment trusts (CITs), such as the Wells Fargo/State Street Global Advisors Global Equity Index Fund, the Wells Fargo/State Street Global Advisors Global Bond Index Fund and the Wells Fargo/BlackRock Short-Term Investment Fund. The complaint similarly says there were insufficient track records for the plan’s fiduciaries to select them as prudent investments. It also notes that each of these three funds are Wells Fargo products that directly and/or indirectly pay fees to Wells Fargo.

The plaintiff says that at the time the committee defendants selected the Target Date CITs for the plan, “there were ample non-proprietary target-date funds available with established performance track records and lower costs than the Target Date CITs.” In addition, she claims that since inception, the Target Date CITs underperformed their benchmark by approximately 2%, causing more than $100 million in losses to participants’ retirement savings. The complaint notes that the Target Date CITs remain the default investment for participants in the plan.

The lawsuit draws attention to other Wells Fargo proprietary investments, including its Treasury Money Market Mutual Fund, which the plaintiff claims were retained in the plan, paid fees to Wells Fargo and were higher cost and/or underperforming funds.

In addition, the plaintiff says the committee defendants used the plan’s assets to seed the Wells Fargo /Causeway International Value Fund (WF International Value Fund), as evidenced by the fact that the plan’s assets constituted more than 50% of the total assets in the fund at year-end 2014. “Without such a substantial investment from the plan, Wells Fargo’s ability to market its new, untested fund would have been greatly diminished,” it states.

The plaintiff also argues that an International Value Fund offered by Causeway Capital Management as a separate account is materially identical yet cheaper than the WF International Value Fund. The expense ratio for the Causeway International Separate Account is 0.32%, while the expense ratio of WF International Value Fund is 0.556%, according to the suit. “Wells Fargo is compensated with these fees,” the complaint says.

The plaintiff notes that each of the CITs is a “common or collective trust fund of a bank,” and the Target Date CITs, Wells Fargo/Causeway International Value Fund, and the Wells Fargo Federated Total Return Bond Fund are established and governed under the Declaration of Trust, which grants Wells Fargo Bank “exclusive management, with respect to the acquisition, investment, reinvestment, holding or disposition of any securities or other property at any time held by it and constituting part of any” CIT. Through the Declaration of Trust, the committee defendants agreed that Wells Fargo Bank “may charge a reasonable fee for its management and administration of [the CITs] and withdraw the amount thereof from the [CITs].”

The lawsuit alleges that Wells Fargo Bank used its management authority over the CITs to invest the CITs and the plan assets therein into Wells Fargo/BlackRock Short-Term Investment Fund and/or the Wells Fargo Stable Return Fund (collective, “WF STIFs”), both of which pay additional fees to Wells Fargo Bank. Wells Fargo Bank also determines how much of the plan’s assets are invested in the WF STIFs and the duration for which they will remain invested.

The complaint states that the stable value fund in which the plan invests is managed by Galliard Capital Management Inc., a registered investment adviser (RIA) and a wholly-owned subsidiary of Wells Fargo. Galliard invests some of the assets within the stable value fund in the WF STIFs. The plaintiff alleges that Wells Fargo Bank used its control over the plan’s assets held in the WF STIFs to generate “float” income from uninvested cash held in these funds, and rather than remitting the “float” income earned from plan assets back to the plan, the bank keeps the “float” income for itself.

Wells Fargo told PLANSPONSOR it is reviewing the complaint but has no further comment.

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