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Fiduciaries Charged with TDF Self-Dealing

A new lawsuit charges 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 target date funds.

The suit, filed Nov. 22 in the U.S. District Court for the District of Minnesota, claims that the $35 billion plan has, since at least 2010 (when plaintiff John Meiners became a participant in the Wells Fargo & Company 401(k) plan) the Benefit Committee, with the knowledge and participation of Wells Fargo, the HR Committee, and the other fiduciary “selected as investments a class of mutual funds — known as target date funds — and designed and maintained a system to maximize the amount of Plan assets invested into those funds.” Moreover, the suit alleges that they did so by, among other things:


  • defaulting certain participant contributions into the Wells Fargo target date funds; and

  • encouraging participants to purchase the funds through an “easy” and “quick” enrollment feature, where participants would, with a check of a box, dedicate all their future contributions into the Wells Fargo target date funds.


Cost, Performance Questioned

The suit alleges that during the period in question “the Wells Fargo target date funds cost on average over 2.5 times more than comparable target date funds while, at the same time, substantially and consistently underperforming those comparable funds” (in this case what are said to be comparable share classes of Vanguard and Fidelity funds) — a result that the suit attributes in part to the fact that “Wells Fargo double charged for its target date funds (the Wells Fargo Dow Jones Target Date Funds) — charging fees for both (1) managing the target date funds themselves, and (2) managing the index funds underlying the target date funds.”

The plaintiff also alleges that the “intentional funneling of participants into the target date funds not only generated substantial revenues for Wells Fargo, but, with Plan assets constituting more than one quarter of total assets in the funds, it provided critical seed money that kept the funds afloat by boosting market share.” The suit alleges that the $3 billion directed into those TDFs by the Wells Fargo plan constitute 28% of the total assets in the Wells Fargo TDFs, with another 29% coming from “other Wells Fargo-directed activity, including third-party 401(k) plans where Wells Fargo serves as a third-party administrator.”

The suit claims that the Vanguard and Fidelity Funds, unlike the Wells Fargo TDFs, do not double charge for management fees; that is, they charged no fees for managing the target date funds themselves, and only charged fees for managing the index funds underlying the target date funds.

As for damages, the suit claims that if the Benefit Committee had instead selected the Vanguard Funds, the weighted average return over the same period would have been 7.02%, a difference that the plaintiff claims would amount to a difference of 10.21% in total returns over that five-year period, or $323 million.

Wells Fargo has been the target of three separate suits by participants in its 401(k) plan, but on very different grounds — basically that the bank’s cross-selling program served to artificially inflate Wells Fargo’s stock held as an investment in the plan.

The TDF-based lawsuit was filed by Lockridge Grindal Nauen PLLP, Elias Gutzler Spicer LLC and Cohen Milstein Sellers & Toll PLLC.

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