Wells Fargo – one of the few providers to date to prevail in a proprietary fund suit – once again finds itself in the litigation crosshairs.
The lawsuit (Wayman v. Wells Fargo & Co., D. Minn., No. 0:17-cv-05153-PJS-KMM, complaint filed 11/17/17), filed last week in a Minnesota federal court, claims that the plan fiduciaries “…breached their duties of loyalty and prudence to the Plan and its participants, including Plaintiff, by failing to establish and use a systematic and unbiased review process to evaluate the performance and cost, regardless of their affiliation to Wells Fargo, of the investment options in the Plan’s portfolio.” As a result, the suit claims that plan participants “…paid higher than necessary fees for both Wells Fargo branded and managed investment options (“proprietary investment options” or “proprietary funds”) and certain non-proprietary investment options for years.”
The previous lawsuit had charged 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 proprietary target-date funds – only to be dismissed in May – with prejudice.
Indeed, the suit takes on some familiar themes: active versus passive, collective trusts and separate accounts versus mutual funds, proprietary versus unaffiliated funds, the use of a money market fund (and retail class at that) rather than stable value, and the alleged inability of a “jumbo” plan (roughly $40 billion today, with 350,000 participants) to negotiate a better deal. That said, the plaintiff acknowledges a lack of specific knowledge on a number of key points alleged in the suit.
However, the plaintiff claims that a “systematic and unbiased review” of the plan’s investment options would have revealed that they could have utilized actively managed small cap blend mutual funds from a variety of companies “that cost from 25% to more than 50% less than the non-proprietary Small Cap Funds,” and could have “also hired numerous investment advisors…to manage a separate account holding small company stocks that would have cost at least 25% to 50% less than the expense ratios charged by the non-proprietary Small Cap Funds.” A similar analysis of the plan investments in the WF International Equity Fund, WF Large Cap Growth Fund, the Wells Fargo Large Cap Value Fund, and the Emerging Markets Equity Fund,
Wells converted their target funds to CITs in December 2016. However, the suit alleges that, had the Plan’s fiduciaries converted the WF Target Funds into the lower-cost WF Target CITs in 2011, “Plan participants would have saved millions in fees…” As it is, the suit alleges that for managing the WF Target Funds for the Plan years 2011 through 2016, Wells Fargo and its affiliates received approximately $79.13 million in fees from Plan participants, and that if they had instead converted the WF Target Funds into the lower expense ratio WF Target CITs at the beginning of 2011, Plan participants would have only paid fees of approximately $26.68 million. And that, of course, means that, according to the plaintiff, “the Plan’s fiduciaries’ failure to convert the WF Target Funds into the lower cost WF Target CITs resulted in Plan participants having at least $52.45 million less in savings for retirement.”
Drawing a connection to the case of Tibble, et al. v. Edison Int. et al., the plaintiff’s suit said that the failure to switch to a collective trust that shares the same investment strategy “…demonstrates that there was no standardized, routine critical review of the Plan investment options by impartial, unbiased committee members and/or the Defendants.” Moreover, the suit claims that the Plan’s fiduciaries “were incentivized not to undertake such a review because Wells Fargo and its affiliates were profiting from the higher fees, which earned Wells Fargo and its affiliates at least $52.45 million in fees from Plan participants’ investment in the WF Target Funds.”
Plaintiff Stacey Wayman, a resident and citizen of the State of Pennsylvania, was employed by Wells Fargo as a Mortgage Underwriter from December 2009 to April 2014 and is a current Plan participant. She was, and continues to be invested in (i) the Wells Fargo 100% Treasury Money Market Fund; (ii) the U.S. Bond Index Fund; (iii) the Wells Fargo Dow Jones Target 2040 Fund; (iv) the Large Cap Value Fund; and (v) the Lazard Emerging Markets Equity Fund. By way of explaining the timing of the suit, the suit notes that she did not have “knowledge of all material facts,” including, “among other things, the cost of the investments in the Plan relative to alternative investments that were available to the Plan but not offered by the Plan) necessary to understand that Defendants breached their fiduciary duties and engaged in other unlawful conduct in violation of ERISA, until shortly before this suit was filed.”
Moreover, the suit acknowledges that she “did not have and does not have actual knowledge of the specifics of Defendants’ decision-making processes with respect to the Plan, including Defendants’ processes for selecting, monitoring, and removing Plan investments,” but explains this by noting that this is information “…solely within the possession of Defendants prior to discovery.”
Moreover, “having never managed a jumbo 401(k) plan, Plaintiff Wayman lacked actual knowledge of reasonable fee levels and prudent alternatives available to such plans,” and “…did not and could not review Benefit Review Committee meeting minutes or other evidence of Defendants’ fiduciary decision making, or the lack thereof.” How then, one might ask, is she able to file suit based on her allegations? Well, the suit claims that “Plaintiff Wayman has drawn reasonable inferences regarding these processes based upon (among other things) the facts set forth herein.”
We shall see if the court finds the inferences to, in fact, be reasonable.
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