Wells Fargo Proprietary TDF Suit Dismissed

A federal judge called comparisons to other funds insufficient, and noted that funneling participant investments into a default fund is normal.

A federal district court judge has granted Wells Fargo’s motion to dismiss a lawsuit accusing it of self-dealing and imprudent investing of its own 401(k) plan’s assets by funneling billions of dollars of those assets into Wells Fargo’s proprietary target-date funds (TDFs).

John Meiners filed the lawsuit last November, also accusing Wells Fargo of using a quick enroll option which defaulted participants into the TDFs to seed the funds and make more money. According to the complaint, Wells Fargo “double charged for its target-date funds—charging fees for both managing the target-date funds themselves, and managing the index funds underlying the target-date funds.”

However, U.S. District Court Judge David S. Doty of the U.S. District Court for the District of Minnesota agreed with Wells Fargo that Meiners’ allegations that the bank breached its fiduciary duty by continuing to invest in its own TDFs when better-performing funds were available at a lower cost are insufficient to plausibly allege a breach of fiduciary duty.

Central to Meiners’ complaint is the allegation that the Wells Fargo funds consistently underperformed Vanguard funds. “In order to plausibly allege a fund is underperforming, Meiners must provide some benchmark against which the Wells Fargo funds can meaningfully be compared,” Doty wrote in his opinion.

He noted that the only benchmark Meiners provides is the Vanguard funds’ performance. However, citing Tussey v. ABB, Inc., Doty said a comparison of the returns for two different funds is insufficient because “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.” Doty added that one would expect the Wells Fargo and Vanguard funds to perform differently because the Wells Fargo funds have a different investment strategy than the Vanguard funds. Specifically, Wells Fargo funds have a higher allocation of bond than Vanguard funds. “Therefore, 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,” he concluded.

NEXT: Fees and seeding the TDFs

Regarding fees, Doty cited other cases in which it was ruled that nothing in the Employee Retirement Income Security Act (ERISA) requires every retirement plan fiduciary to scour the market to find and offer the cheapest possible fund. Meiners argues his complaint does not merely allege that the bank failed to invest in the cheapest fund available, but it alleges that Wells Fargo acted in self-interest by choosing higher-cost affiliated funds over lower-cost non-affiliated funds. Meiners’ support of his complaint is that two funds, Fidelity and Vanguard, are less expensive.

“If such allegations were sufficient to survive a motion to dismiss, it would render fiduciaries liable to suit for failing to choose the cheapest, non-affiliated fund—even if that fund is ‘plagued by other problems,’” Doty wrote. “Therefore, Meiners must plead something more to make his excessive fees claim plausible.”

Doty added that nothing in the complaint suggests that the Vanguard and Fidelity funds are reliable comparators, offer similar services, or are of similar size, nor does it contain facts showing that the Wells Fargo funds are more expensive when compared to the market as a whole. “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,” Doty wrote.

Meiners claims that Wells Fargo set its TDFs as the default for participants in order to seed its own funds, but Doty found this also insufficient to give rise a breach of fiduciary duty claim, noting that it is not uncommon for plans to provide default investment options for participants who fail to make an investment election, and Congress specifically anticipated this scenario by providing guidelines for default investment options. Doty also found the fact that Wells Fargo chose affiliated funds as the default option is, without more, insufficient to show a breach of its fiduciary duty.

“Although 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. Other than the unsupported allegations of excessive fees and under-performance …, Meiners pleads no facts suggesting that the choice of affiliated funds was the result of flawed decision-making,” Doty concluded.