A lawsuit that had charged plan fiduciaries with engaging in a “practice of self-dealing and imprudent investing of Plan assets by funneling billions of dollars” into a series of proprietary target-date funds has come up short – again.
The suit had been brought by John Meiners, a participant in Wells Fargo’s 401(k) retirement plan, who charged that of the 26-27 investment options in the plan, a dozen were Wells Fargo Dow Jones Target Date Funds managed by a Wells Fargo subsidiary. The original suit, filed in November 2016, alleged not only that the Wells Fargo TDFs cost on average more than two and a half times what comparable TDFs cost, but also that they substantially and consistently underperformed comparable funds.
Moreover, he alleged that the plan fiduciaries “designed and maintained a system to maximize the amount of Plan assets invested into those funds” by defaulting certain participant contributions into the Wells Fargo TDFs and encouraging participants to purchase the funds through an “easy” and “quick” enrollment feature.
Meiners failed to make his case in May 2017, when in considering Wells Fargo’s motion to dismiss, Judge David S. Doty of the U.S. District Court for the District of Minnesota noted that he was inclined to agree with Wells Fargo that the allegations that Wells Fargo breached its fiduciary duty by continuing to invest in its own TDFs when better-performing funds were available at a lower cost were “insufficient to plausibly allege a breach of fiduciary duty.” He dismissed claims that the Wells Fargo TDFs underperformed, finding that the Fidelity and Vanguard funds offered as benchmarks amounted to comparing apples and oranges.
Doty noted that the Wells Fargo funds have a higher allocation of bonds than the Vanguard funds, and that “…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.”
With regard to the allegation that Wells Fargo acted in its own interest by choosing higher-cost affiliated funds over lower-cost non-affiliated funds, Doty noted that “Meiners’s only support of this interpretation of his complaint is that two funds, Fidelity and Vanguard, are less expensive. This, in effect, attempts to hold Wells Fargo liable for failing to choose the cheapest fund,” and that “without a meaningful comparison, the mere fact that the Wells Fargo funds are more expensive than two other funds does not give rise to a plausible breach of fiduciary duty claim.”
Meiners fared no better in his appeal to the U.S. Court of Appeals for the 8th Circuit (which is the first appeals court to uphold a ruling in favor of a financial company sued over its decision to include proprietary funds in its retirement plan). The opinion, issued by Judge L. Steven Grasz, joined by Judges Raymond W. Gruender and Ralph R. Erickson (Meiners v. Wells Fargo & Co., 8th Cir., No. 17-02397, opinion affirming district court decision 8/3/18), noted that two breaches of fiduciary duty under ERISA were alleged: (1) retaining Wells Fargo’s proprietary investment funds as options for Wells Fargo employees’ 401(k) retirement plan; and (2) defaulting to these proprietary investment funds for plan participants who did not elect other options. And they began by accepting “…the well-pled allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor.”
He noted that ERISA plaintiffs claiming a breach of fiduciary duty have a “challenging pleading burden because of their different levels of knowledge regarding what investment choices a plan fiduciary made as compared to how a plan fiduciary made those choices.” Specifically, he noted that while ERISA plaintiffs typically have extensive information regarding the selected funds (because of ERISA’s disclosure requirements), “…they typically lack extensive information regarding the fiduciary’s methods and actual knowledge” because those details “tend to be ‘in the sole possession of [that fiduciary].’” As a result, he noted, “the challenge for ERISA plaintiffs” is to use the data about the selected funds and some circumstantial allegations about methods to show that “a prudent fiduciary in like circumstances would have acted differently.”
As for how that would be done in a case such as this, Judge Grasz noted that, “a plaintiff must provide a sound basis for comparison — a meaningful benchmark.” And by that he noted a previous caution that “our ultimate conclusions rest on the totality of the specific allegations in this case” and that “we do not suggest that a claim is stated by a bare allegation that cheaper alternative investments exist in the marketplace.” Grasz went on to state that the “critical inquiry, then, is whether the missing factual allegations are facts about the funds themselves, which ERISA plaintiffs can research, or facts about the fiduciary’s internal processes, which ERISA plaintiffs generally lack.”
With that in mind, Grasz concluded that the plaintiff here failed to state a plausible claim because it lacks “sufficient factual matter, accepted as true,” to demonstrate that the Wells Fargo TDFs "were an imprudent choice” – specifically that he did not plead facts showing the Wells Fargo TDFs were underperforming funds, only that “one Vanguard fund, which he alleges is comparable, performed better than the Wells Fargo TDFs.” But he noted that the “fact that one fund with a different investment strategy ultimately performed better does not establish anything about whether the Wells Fargo TDFs were an imprudent choice at the outset.” Judge Gransz also acknowledged that “no authority requires a fiduciary to pick the best performing fund.”
The court was also “…unpersuaded by Meiners’s argument that the Wells Fargo TDFs were too expensive due to their fees” – basically because while the ruling acknowledged that “different shares of the same fund were a meaningful benchmark” – here they found the comparison to “cheaper alternative investments with some similarities” an inappropriate comparison.
And while Judge Gransz acknowledged that “a few district court opinions appear to support Meiners’s argument…” this court did “…not find them persuasive” because, in this court’s evaluation, “the existence of a cheaper fund does not mean that a particular fund is too expensive in the market generally or that it is otherwise an imprudent choice.” Judge Gransz continued that, “any other conclusion would exempt ERISA plaintiffs both from pleading benchmarks for the funds and from pleading internal processes about selecting funds. An ERISA plaintiff must offer more than ‘labels and conclusions’ about the fees before a complaint states a claim.”
As for the issue of improper self-dealing motivations in offering the Wells Fargo TDFs, Judge Gransz noted that “absent any well-pled factual allegations that the Wells Fargo funds were an imprudent choice, no inference can be reasonably drawn that the Wells Fargo Defendants retained those funds (or made them default investments) out of improper motives. We cannot reasonably infer they acted out of a motive to seed underperforming or inordinately expensive funds if Meiners has not plausibly pled that those funds were, in fact, underperforming or inordinately expensive.”
There was also an allegation by the plaintiff that the lower court hadn’t looked at the complaint “as a whole” – a premise to which this court found “no merit.” Indeed, Judge Gransz cited as “exactly right” the district court's summary statement that, “Taken as a whole, the complaint merely supports an inference that Wells Fargo continued to invest in affiliated target date funds when its rate of return was lower than Vanguard, which had a different investment strategy, and that was more expensive than Vanguard and Fidelity funds. These allegations do not give rise to an inference of a breach of fiduciary duty, and as a result, that claim must be dismissed.”
Moreover, Gransz explained that, “When both lawful and unlawful conduct would have resulted in the same decision, a plaintiff does not survive a motion to dismiss by baldly asserting that unlawful conduct occurred.
“The district court correctly determined that Meiners’s omission of any meaningful benchmark in his Complaint meant that he failed to allege any facts showing the Wells Fargo TDFs were an imprudent choice,” Gransz concluded. “As a result, Meiners’s Complaint failed to state a claim for relief under ERISA and we affirm its dismissal.”