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 been dismissed – with prejudice.
The suit, brought by John Meiners, a participant in Wells Fargo's 401(k) retirement plan, 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 suit, filed last November, alleged not only that the TDFs cost on average over 2.5 times more than comparable TDFs while, at the same time, substantially and consistently underperforming comparable funds, but 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.
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 while the plaintiff Meiners alleged that Wells Fargo breached its fiduciary duty by continuing to invest in its own target-date funds when better-performing funds were available at a lower cost, he was inclined to agree with Wells Fargo’s argument that these allegations were “insufficient to plausibly allege a breach of fiduciary duty.”
Different Benchmarks
“Central to Meiners’s complaint is the allegation that the Wells Fargo funds consistently underperformed Vanguard funds,” noted Judge Doty, who went on to write that “the rate of return for the Wells Fargo and Vanguard funds are only relevant insofar as they suggest that Wells Fargo’s decision making process was flawed,” and to plausibly allege a fund is underperforming, Meiners had to provide some benchmark against which the Wells Fargo funds can meaningfully be compared. However, Doty noted that the only benchmark that Meiners provides is the Vanguard funds’ performance, and that “a comparison of the returns for two different funds is insufficient because (citing Tussey v. ABB, Inc., 850 F.3d 951 , 960 (8th Cir. 2017), “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.”
Basically, Doty noted that the Wells Fargo funds have a higher allocation of bond than 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.”
While Meiners argued that Wells Fargo acted in self-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.”
Default ‘Faults’?
As for the default fund selection and enrollment structures, Judge Doty also found these allegations “insufficient to give rise a breach of fiduciary duty claim.” He noted that it wasn’t uncommon for plans to provide a default option and that “the fact that Wells Fargo chose affiliated funds as the default option is, without more, insufficient to show a breach of its fiduciary duty.” He noted that while “…a fiduciary’s choice of affiliated funds is relevant in showing that the fiduciary may have acted in its financial self-interest, Meiners must plead additional facts showing that the fiduciary’s decision was based on financial interest rather than a legitimate consideration.
“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,” Doty concluded.
Finally, since Meiners had not adequately pleaded an underlying breach of fiduciary duty, “his breach of co-fiduciary duty and knowing participation in a breach of fiduciary duty claims must also be dismissed,” wrote Judge Doty, granting the motion to dismiss and dismissing the case with prejudice – meaning that the case can’t be brought back to court.
