Wells Fargo 401(k) Suit Challenges Use of Proprietary TDFs

The lawsuit accuses the bank of using an "easy enroll" feature to funnel funds into its TDFs, which it says charge too much.

By John Manganaro | November 28, 2016
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With barely a month left in 2016, predictions that the rapid pace of retirement plan fee litigation would only accelerate during the year have largely proven true.

The latest lawsuit filed targets sponsors and fiduciaries of the Wells Fargo and Company 401(k) plan—calling out by name the Employee Benefit Review Committee and its members, as well as the Human Resources Committee of the Wells Fargo Board of Directors. Defendants are accused of violating their duties of loyalty and prudence in investing plan assets; plaintiffs are seeking class action status for a significant portion of the 350,000 invested in the defined contribution (DC) plan.

“Specifically, since at least 2010, defendants have engaged in a practice of self-dealing and imprudent investing of plan assets by funneling billions of dollars of those assets into Wells Fargo’s own proprietary funds,” the suit claims.

The complaint further suggests the benefit committee, with the knowledge and participation of Wells Fargo, the HR committee, and the other fiduciary defendants, selected as investments a class of mutual fund target-date funds (TDFs) and designed and maintained a system to maximize the amount of plan assets invested into those funds.

“Defendants 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,” the complaint suggests.

Whether or not the practice should be deemed problematic on its face under the Employee Retirement Income Security Act (ERISA), defendants go on to suggest the Wells Fargo TDFs “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.” The substantial cost inflation was due, according to the complaint, to the fact that 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.”

NEXT: Details from the complaint