A lawsuit against Wells Fargo over the use of its own investment products in the company’s $40 billion 401(k) plan this week cleared a major hurdle.
On Wednesday a federal judge denied a motion to dismiss the case, finding that the plaintiffs’ “allegations are far more than general assertions, and that accepted as true, show that [the] defendants engaged in prohibited transactions.”
The development likely gives the plaintiffs more leverage for a settlement, as the class-action case has moved one step closer to a trial.
A group of plaintiffs filed their complaint over a year ago, alleging that Wells Fargo and Galliard Capital Management violated the Employee Retirement Income Security Act in connection with in-house collective investment trusts used within the plan, including the bank’s target-date products. The CITs were costlier and had poor performance relative to other options, according to the complaint.
Wells Fargo moved about $5 billion in assets into its target-date CIT series built in 2016, from the plan’s prior target-date option. That allegedly resulted in $100 million in “losses,” or underperformance compared to certain third-party products, the plaintiffs contended.
“Judge [Donovan] Frank seems to get and care about the fact that there are a lot of employees who are in this 401(k). The plan is one of the largest in the country,” said plaintiffs’ attorney Michelle Yau, partner at Cohen Milstein Sellers & Toll. “He really got that these are real people who are relying on their 401(k) accounts to provide for them in retirement.”
The defendants argued for dismissal based on the plaintiff not making plausible allegations for self-dealing, as “there was no gain to be had from seeding the TD Collective Trusts or Causeway Fund because those investments were designed exclusively for the plan,” court records state. Further, fees paid to Wells Fargo affiliates in connection with the CITs were paid by the bank, not participants, the company argued. Additionally, the products were based on performance history of older products and the new ones outperformed benchmarks “at various points, and modest periods of underperformance cannot support an inference of imprudence,” court records stated.
Wells Fargo was previously sued over the prior target-date mutual fund series within its plan, although that case was dismissed in 2017. The lead plaintiff in the current case is represented by the same firm that brought the earlier suit, Cohen Milstein.
Wells Fargo declined to comment on the case.
The case is in U.S. District Court in the District of Minnesota, having been moved from the Northern District of California.
Michigan-based Bronson Healthcare was sued May 6 over allegedly excessive record-keeping and investment-management fees within its defined-contribution plan.
Between 2015 and 2019, participants in the plan paid an average of $81 annually for plan administration, which was more than double what a reasonable rate would be, the plaintiffs stated in the complaint filed in U.S. District Court in the Western District of Michigan Southern Division.
The law firms representing the proposed class – Walcheske & Luzi and the Haney Law Firm – cite allegedly excessive costs for Fidelity’s plan services and actively managed Freedom target-date series, although Fidelity is not a party in the case.
A better alternative to the actively managed series would have been Fidelity’s index version of the product, which has considerably lower fees, according to the complaint. The plaintiffs also pointed to Fidelity mutual funds that would have been more reasonable alternatives to other investment options on the plan menu that were provided by other investment firms.
“The two fund families have nearly identical names and share a management team,” the complaint read. “The active suite is dramatically more expensive than the index suite, and riskier in both its underlying holdings and its asset allocation strategy.”
Use of the active series “constitutes a glaring breach of their fiduciary duties,” the plaintiffs stated.
At the end of 2019, 62% of the $737.5 million in the plan’s assets were invested in the actively managed series, according to the complaint. The plan included more than 11,000 participants at that time.
Allowing the allegedly high costs was a breach of both the duties of loyalty and prudence under ERISA, the plaintiffs wrote.
Bronson Healthcare did not respond to a request for comment.
The company allegedly mixed the plan’s assets with those in its general account and invested solely in certificates of deposit, particularly with foreign banks. The plan, which has 54 participants, represented about $6.4 million as of 2018, according to the most recent filing with the Department of Labor.
Based on filings made in 2013, which were the most recent when the suit was filed, the plan’s investment returns for the reporting year were 0.77%, compared with average returns for similarly sized 401(k)s of more than 10% that year, according to the 2019 complaint.
The terms of the settlement were not disclosed in the notice filed with the court.
Law firms Solouki Savoy and McKay Law represent the plaintiffs.