Compliance April 6, 2022

Wells Fargo Agrees to Settle Proprietary Funds Lawsuit

The settlement agreement includes a “significant monetary recovery,” the plaintiffs note in a memo in support of a motion for preliminary approval.

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Parties in a lawsuit against Wells Fargo 401(k) plan fiduciaries have filed a motion for preliminary approval of a settlement.

According to a memo filed by the plaintiffs in support of the motion, under the terms of the proposed settlement, the defendants will pay a gross settlement amount of $32.5 million into a common fund for the benefit of the proposed settlement class. As the memo notes, “This is a significant monetary recovery for the class.” And, it says, the settlement “falls well within the range of court-approved settlements in similar [Employee Retirement Income Security Act] cases.”

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The original lawsuit, filed in March 2020, claims that upon the creation of the Wells Fargo/State Street Target collective investment trusts, or Target Date CITs, in 2016, the committee defendants added the 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 participants’ retirement savings from the plan’s previous target-date option into the Target Date CITs.

In addition, the lawsuit alleges the committee defendants used the plan’s assets to seed the Wells Fargo/Causeway 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.

Last May, Judge Donovan W. Frank of the U.S. District Court for the District of Minnesota refused to dismiss the suit, deciding that the “numerous and specific allegations are sufficient to support an inference of imprudence and disloyalty.” He also said the “allegations are far more than general assertions, and that accepted as true, show that defendants engaged in prohibited transactions.”

Participants April 5, 2022

401(k) Index Shows Participants Favored Fixed Income

Investors had net trading dollars move from equities to fixed income during more than two-thirds of the first quarter’s trading days.

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Alight Solutions has published March updates from its 401(k) Index, also noting that even with volatility returning to Wall Street, 401(k) investors were busy traders throughout the first quarter of 2022.

There were five above-normal trading days in March, often occurring when the market fell, Alight says. Despite the market rally for the month, investors continued to move money from equities to fixed income.

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On average, 0.014% of 401(k) balances were traded daily, compared to an average of 0.02% last month. Investors favored moving assets into fixed-income funds during 15 out of 23 trading days. Trading inflows overwhelmingly went to stable value funds, while outflows were primarily from target-date, company stock and mid-cap U.S. equity funds, Alight says.

After reflecting market movements and trading activity, the index found average asset allocation in equities increased from 69.5% in February to 69.9% in March. Additionally, new contributions to equities increased from 69.5% in February to 69.7%.

In its observations for the first quarter, Alight notes there were 16 above-normal trading days in the quarter—a stark contrast to the three above-normal days seen in all of 2021. Net transfers as a percentage of starting balances were 0.46%, nearly equal to the percentage seen in the prior 12 months (0.53%). Net trading activity significantly favored fixed income.

Alight’s data shows that 42 out of 62 trading days in the first quarter saw net trading dollars moving from equities to fixed income, with the highest trading days generally occurring on days when stocks fell significantly.

According to the index, a “normal” level of relative transfer activity is when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

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