Bloomberg Law
Aug. 3, 2018, 3:40 PMUpdated: Aug. 3, 2018, 5:07 PM

Wells Fargo Gets Big Win in Appeal Over 401(k) In-House Funds (1)

Carmen Castro-Pagan
Carmen Castro-Pagan

Wells Fargo & Co. scored a big win when an appeals court refused to revive a lawsuit accusing it of failing to remove allegedly expensive and underperforming proprietary funds from its 401(k) plan.

The U.S. Court of Appeals for the Eighth Circuit is the first appeals court to uphold a ruling in favor of a financial company sued over its decision to include proprietary funds in its retirement plan, which workers claim carry excessive fees and perform poorly.

More than two dozen financial companies have been targeted with similar lawsuits, including BlackRock, T. Rowe Price, and JP Morgan. So far, Wells Fargo and Capital Group are the only companies that have succeeded in getting such lawsuits dismissed. Judges have certified classes in cases against American Century Services LLC, Insperity Inc., BB&T Corp., and Franklin Templeton.

The ruling ends a lawsuit filed two years ago accusing Wells Fargo of breaching its fiduciary duties under the Employee Retirement Income Security Act. The lawsuit alleged that Wells Fargo filled its retirement plan with expensive and underperforming proprietary target-date funds to maximize the bank’s profits when less expensive, comparable funds were available.

The investor who filed the lawsuit failed to allege facts showing the affiliated target-date funds at issue were underperforming funds and, thus, an imprudent choice for the plan, the appeals court held Aug. 3.

The investor’s claim that Wells Fargo acted improperly and for its own benefit also failed. In the absence of a sufficient allegation that the Wells Fargo funds were an imprudent choice, no inference can be reasonably made that the bank retained those funds out of improper motives, the judges said.

The judges affirmed the district court decision that dismissed the lawsuit because the investor didn’t provide a meaningful benchmark for comparing the Wells Fargo funds. It wasn’t improper for that court to rule that the Vanguard fund’s performance wasn’t a meaningful benchmark, the judges said.

The Eighth Circuit has found that different shares of the same fund are a meaningful benchmark. But the investor in this case didn’t match that benchmark because he alleged that cheaper alternative investments with “some similarities” exist in the marketplace, the judges said.

The judges acknowledge the investor’s argument that the district court’s findings regarding Vanguard might be improper at this stage. But they went on to say that the court was correct to recognize a “potential pattern of plaintiffs” trying to convert failure to invest in Vanguard, without more factual allegations, into a breach of fiduciary duty.

The ruling is noteworthy for holding that the existence of a cheaper fund doesn’t mean that a particular fund is too expensive in the market generally or that it’s otherwise an imprudent choice.

Judge L. Steven Grasz issued the opinion, which was joined by Judges Raymond W. Gruender, and Ralph R. Erickson.

Cohen Milstein Sellers & Toll PLLC, Elias Gutzler Spicer LLC, and Lockridge Grindal Nauen PLLP represented the investor. Proskauer Rose LLP and Dorsey & Whitney LLP represented Wells Fargo.

The case is Meiners v. Wells Fargo & Co., 8th Cir., No. 17-02397, opinion affirming district court decision 8/3/18.

(updated with additional reporting)

To contact the reporter on this story: Carmen Castro-Pagan in Washington at

To contact the editors responsible for this story: Jo-el J. Meyer at; Martha Mueller Neff at