Judge Moves Forward Wells Fargo 401(k) Self-Dealing Suit

The suit alleges that defendants used the plan to increase their own revenue and seed new funds. 

A federal district court judge has moved forward a lawsuit alleging that Wells Fargo 401(k) plan fiduciaries should have been able to obtain superior investment products at a very low cost but instead chose proprietary products for their own benefit, increasing fee revenue for the company and providing seed money to newly created Wells Fargo funds.

The lawsuit, filed last March, claims that upon the creation of the Wells Fargo/State Street Target CITs (Target Date CITs) in 2016, the committee defendants added the collective investment trusts (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.

In addition, the plaintiff alleges 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,” the complaint states.

The lawsuit further alleges that plan fiduciaries selected and retained for the plan 17 Wells Fargo proprietary funds, many of which underperformed the benchmark that the defendants selected as an appropriate broad-based market index for each fund.

The defendants argued that the fiduciary breach allegations should be dismissed because they fail to give rise to an inference of imprudence or disloyalty. The defendants said the Target Date CITs and the Causeway fund could not have been offered to generate seed money when the Target Date CITs were designed exclusively for the plan and the investment manager of the Causeway fund was unaffiliated with Wells Fargo. They also argued that the Target Date CITs were modeled after two other substantially similar investments with extensive track records.

The defendants said the plaintiff failed to identify suitable comparators to establish that the Wells Fargo funds charged excessive fees. However, Judge Donovan W. Frank of the U.S. District Court for the District of Minnesota decided that the plaintiff’s “numerous and specific allegations are sufficient to support an inference of imprudence and disloyalty.” He added that by using the same benchmarks Wells Fargo used for comparison, the plaintiff makes “considerably more than a bare allegation that cheaper investments exist in the marketplace.”

Frank also found that the plaintiff plausibly pleaded that the defendants engaged in transactions prohibited under the Employee Retirement Income Security Act (ERISA). He said the plaintiff plausibly alleged that the defendants caused the plan to purchase property in Wells Fargo-affiliated funds from Wells Fargo and Wells Fargo Bank, which are parties-in-interest; that defendants Wells Fargo Bank and Galliard Capital Management caused the transfer of plan assets to Wells Fargo and its affiliates through fees associated with the Wells Fargo funds; and that Wells Fargo and Galliard seeded newly launched funds and directed revenue to Wells Fargo from the plan’s assets through fees.

“The court finds that [the plaintiff’s] allegations are far more than general assertions, and that accepted as true, show that defendants engaged in prohibited transactions,” Frank wrote in his opinion. “The court similarly finds that whether any prohibited transaction exemption applies to [the plaintiff’s] claims is an affirmative defense that cannot be resolved on a motion to dismiss.”