Commentary April 05, 2022 at 07:44 AM Share & Print
What You Need to Know
- The lawsuit involved Wells Fargo’s target date collective investment trusts.
- The $32.5 million settlement recovers 40% of all fee damages.
- The CITs had no prior performance history or track record.
Wells Fargo has agreed to pay $32.5 million for self-dealing related to a 2020 class-action lawsuit involving its target date collective investment trusts, which charged high fees and underperformed.
The March 13, 2020, suit was brought by Yvonne Becker, a participant in the Wells Fargo & Co. 401(k) Plan, on behalf of all participants and beneficiaries in the plan.
Becker alleged Wells Fargo breached its fiduciary duties by failing to “prudently and loyally select and monitor” the plan’s investment options.
Under the terms of the April 1 settlement, filed in the U.S. District Court for the District of Minnesota, the $32.5 million — which recovers 40% of all fee damages — will be deposited into a common fund.
Details of the Case
In 2016, Wells Fargo Bank established a new series of target date collective investment trusts called the “Wells Fargo/State Street Target CITs.”
The Target Date CITs were designed to invest the plan’s assets into a series of other Wells Fargo funds, the suit brought by Becker and the class states.
Upon their creation in 2016, Wells Fargo added the Target Date CITs to the plan, “even though the funds had no prior performance history or track record which could demonstrate that they were appropriate funds for the Plan,” the suit states.
Despite the lack of a track record, Wells Fargo transferred nearly $5 billion of participant retirement savings from the plan’s previous target date option into the Target Date CITs, according to the suit.
The decision to funnel plan assets “into untested, proprietary funds/CITs flouts fundamental standards of prudent investing,” the suit states.
Wells Fargo “plainly did not (and necessarily could not) meet this threshold standard, because no ‘information about performance’ existed for the brand-new Target Date CITs into which nearly $5 billion of Plan assets were transferred in 2016, and thus Plan fiduciaries had nothing to consider,” the suit states.
At the time Wells Fargo selected the Target Date CITs for the plan, “there were ample non-proprietary target date funds available with established performance track-records and lower costs than the Target Date CITs,” the suit states.
The Target Date CITs “dramatically underperformed their respective benchmarks,” according to the suit.
“In just one year, the Target Date CITs underperformed their benchmarks by over 2%.”
Since their inception, the suit continues, “the Target Date CITs underperformed their benchmark by approximately 2%, causing over one-hundred million dollars in losses to participants’ retirement savings.”