On the heels of a win for Wells Fargo in 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), another participant has filed an excessive fee and self-dealing lawsuit.
The new lawsuit claims the plan’s fiduciaries breached their duties of loyalty and prudence to the plan and its participants 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. Throughout the complaint, the plaintiff alleges that the plan’s fiduciaries’ lack of a systematic and unbiased review process caused plan participants to pay an unnecessarily high expense ratio for investments, not just for Wells Fargo proprietary funds, but for the nonproprietary funds which comprised the proprietary funds, as well as other nonproprietary funds.
According to the complaint, as a result of plan fiduciaries’ breaches of duty under the Employee Retirement Income Security Act (ERISA), participants paid higher than necessary fees for both Wells Fargo-branded and managed investment options and certain non-proprietary investment options for years.
The lawsuit says defendants’ lack of a systematic and unbiased review of the plan’s investment options resulted in: including higher cost and poorly performing proprietary investment options in the plan to the detriment of plan participants, failing to use the plan’s enormous size (between $22.8 billion and $39.4 billion in assets to negotiate lower fees for both proprietary and non-proprietary investment options included in the plan, maintaining a proprietary money market fund alongside a better performing and significantly cheaper stable value fund, and failing to switch higher cost and poorly performing investment options for cheaper and better performing options available in the market.
“Even though the Plan is and has been one of the largest in the country, Defendants maintained investment options that charged Plan participants fees that were significantly higher than were available to a plan of its size. Moreover, Defendants engaged in self-dealing by selecting and maintaining proprietary investment options that both cost more than and underperformed other mutual funds available in the market, which cost Plan participants millions of dollars in excessive fees and poor performance,” the complaint says.
The suit questions the use of actively managed versus passively managed funds. It also suggests that collective trusts and separate accounts are better vehicles than mutual funds for retirement plans.
The complaint also says, “for both the proprietary and nonproprietary investment options, the expense ratios Plan participants paid did not meaningfully decline, if at all, even though the Plan’s assets substantially increased throughout the Class Period. Accordingly, the fees paid by Plan participants were excessive and unreasonable. Moreover, the high fees of the proprietary investment options and the sheer size of the assets Plan participants maintained in the proprietary funds guaranteed Wells Fargo and its affiliates tens of millions in profits from fees.”
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