A major financial institution finds itself accused of “corporate self-dealing at the expense of the retirement savings of company employees.”
The latest suit (Becker v. Wells Fargo & Co., N.D. Cal.., No. 3:20-cv-01803, complaint 3/13/20) was filed in the Northern District of California on behalf of Plaintiff Yvonne Becker, who was an employee of Wells Fargo for approximately 26 years, and was one of some 344,287 participants in the $40 billion plan.
As has been the case with similar suits brought by participants in the 401(k) plans of financial services companies, plaintiff Becker claims that the fiduciary defendants “selected and maintained investments for the Plan in a manner that benefited Wells Fargo & Co. (and its subsidiaries and executives) rather than selecting and maintaining investments with an eye single to the interests of the Plan and its participants and beneficiaries, in dereliction of their ERISA fiduciary duties.” More specifically the suit alleges that “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.”
CIT Charges
While the use of mutual funds by large plans rather than what are generally seen as less expensive options such as collective investment trusts is a frequent allegation in excessive fee cases, this time it was the choice of collective investment trusts, or CITs, that was at issue. With regard to the most recent litigation, the plaintiff challenges:
-
The addition of Target Date collective investment trusts to the plan “…even though the funds had no prior performance history or track record which could demonstrate that they were appropriate funds for the Plan.”
-
The transfer of nearly $5 billion in plan assets from the plan’s existing target date option to those target date CITs.
-
The suit also makes the claim that “at a minimum, prudent fiduciary process requires a three-year performance history for an investment option prior to its inclusion in a plan.”
Indeed, while the Target Date CITs weren’t the only aspect of concern noted, they were a focal point. The suit goes on to claim that:
- Since their inception, the Target Date CITs “underperformed their benchmark by approximately 2%, causing over one-hundred million dollars in losses to participants’ retirement savings,” according to the suit, while the Target Date CITs “remain the default option for participants in the Plan.”
- The fact that the Target Date CITs invest the Plan’s assets into other Wells Fargo funds, also CITs… each of which “…are Wells Fargo products that are marketed to outside investors and directly and/or indirectly pay fees to Wells Fargo.” These too “had insufficient performance track-records to qualify them for investment under standards of prudence,” according to the suit.
- The Wells Fargo/SSGA Global Bond Index Fund was included in the plan via the Target Date CITs, though ”to the best of Plaintiff’s knowledge based on available information, neither the glidepath nor the combination of indices underlying the Target Date CITs had been tested for “target-date” investing before the Committee Defendants added the Target Date CITs to the Plan,” although there “were ample non-proprietary target date funds available with established performance track-records and lower costs than the Target Date CITs” available.
Other Funds
The suit also notes that the defendants included and retained the WF International Value Fund as a Plan investment (via the International Fund), “despite the availability of cheaper and materially identical alternative investments, to seed and prop up the WF International Value Fund.” The suit claims that “they did this to serve Wells Fargo’s business interests, by using Plan assets as seed money for the newly created and untested proprietary fund,” and that they “…failed to engage in a prudent process before adding the WF International Value Fund as a Plan investment because they failed to consider the Fund’s historical performance (which was non-existent) before adding it the Plan.” Moreover, they point to the “fact that the Plan’s assets constituted more than 50% of the total assets in the Fund at year-end 2014.”
The suit also cites what it claims are “excessive fees and sustained and significant underperformance” of the WF Treasury Fund, and claims that “the Committee Defendants supported Well Fargo’s struggling small-cap business by retaining the WF Growth Fund in the Plan, even though the fund is unreasonably expensive for one of the country’s largest plans, has underperformed its benchmarks and widely accepted non-proprietary funds, and is unnecessary for the Small Cap Fund’s strategy.”
Moreover, the suit 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,” but that “…rather than remitting the ‘float’ income earned from Plan assets back to the Plan, Wells Fargo Bank keeps the ‘float’ income for itself.”
The Bottom Line(s)
Ultimately, the plaintiff here accuses the Wells Fargo plan fiduciaries of:
-
“Choosing to maintain Wells Fargo proprietary funds as investment options for the Plan without adequately considering non-proprietary funds that did not have excessive expenses and which performed better than the Wells Fargo funds;
-
“Failing to monitor the Plan investment options and remove Wells Fargo-affiliated funds by, among other things: (i) giving preferential treatment to Wells Fargo-proprietary funds; (ii) failing to avoid conflicts of interest; (iii) failing to adequately consider non-proprietary funds which did not have unnecessary fund layering and excessive fees and expenses, and which performed better than the Wells Fargo funds; (iv) failing to remove Wells Fargo proprietary funds from the Plan which were selected based on an imprudent and disloyal process which gave preferential treatment to Wells Fargo funds; and (v) failing to adequately consider whether continuing to invest Plan assets in Wells Fargo proprietary funds constituted party-in-interest transactions.”
Concluding that, “As a direct and proximate result of the above breaches of fiduciary duties, the Plan and its participants have suffered hundreds of millions of dollars of losses in retirement assets, for which all Defendants named in this Count are jointly and severally liable.”
Other Suits
It's not the first, or only, time that Wells Fargo has been sued by participants in its own plan on these factors (see Fiduciaries Charged with TDF Self-Dealing and Another Participant Sues Wells Fargo 401(k) Fiduciaries. In 2018, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of a one of those suits, based on similar grounds (see Wells Wins Again in Proprietary TDF Self-Dealing Suit).
