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Wells Fargo Must Defend Affiliated Funds in $40 Billion 401(k)

May 12, 2021, 7:41 PM

Wells Fargo & Co. must face a proposed class action challenging the affiliated funds in its $40 billion 401(k) plan after a Minnesota federal judge on Wednesday ruled that plan participants provided meaningful benchmarks showing how the banking giant favored its own funds over cheaper and better-performing alternatives.

Yvonne Becker’s complaint relies on the same benchmarks set by Wells Fargo to argue that the bank kept its own funds in the 401(k) plan despite multi-year periods of underperformance, Judge Donovan W. Frank of the U.S. District Court for the District of Minnesota held. Becker’s “numerous and specific allegations” support her claim that Wells Fargo’s plan management was imprudent and disloyal under the Employee Retirement Income Security Act, he said.

“Becker’s allegations can be understood to assert that the Plan includes a variety of proprietary funds which were selected by the Fiduciary Defendants despite better performing and cheaper options,” Frank said. She further alleges that these options “were chosen to benefit the Defendants at the expense of Plan participants.”

These allegations “are sufficient to infer that the decision-making process by which the Fiduciary Defendants selected and managed the Wells Fargo Funds was tainted by breach of their fiduciary duties,” Frank said.

Frank’s decision comes three years after Wells Fargo defeated similar allegations in the U.S. Court of Appeals for the Eighth Circuit. But unlike the allegations rejected by the Eighth Circuit, Becker’s complaint provides meaningful benchmarks by which to assess the Wells Fargo funds, because it relies on “the very benchmarks that Defendants themselves selected for comparison,” Frank said.

He also allowed Becker to move forward with claims under ERISA’s prohibited transaction rules based on the plan’s alleged purchase of affiliated funds from Wells Fargo.

Becker’s lawsuit challenges the Wells Fargo target-date collective investment trusts in the company’s 401(k) plan, which are the default options for participants who don’t select their own investments. Wells Fargo transferred about $5 billion worth of plan assets to these target-date trusts in 2016, even though the trusts were newly established and had “no prior performance history or track record which could demonstrate that they were appropriate,” Becker claims.

Becker is represented by Cohen Milstein Sellers & Toll PLLC and Zimmerman Reed LLP. Wells Fargo is represented by Proskauer Rose LLP and Dorsey & Whitney LLP.

The case is Becker v. Wells Fargo & Co., 2021 BL 175757, D. Minn., No. 0:20-cv-02016, 5/12/21.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Patrick L. Gregory at pgregory@bloomberglaw.com

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