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Wells Fargo faces 401(k) lawsuit

Plaintiffs seek class certification in case alleging prohibited transactions

Laura Brown//October 5, 2022

On the table are financial reports, a pen, a magnifying glass and a notebook with the inscription - ERISA. image

Wells Fargo faces 401(k) lawsuit

Plaintiffs seek class certification in case alleging prohibited transactions

Laura Brown//October 5, 2022

Plaintiffs seek class certification in an Employee Retirement Income Security Act lawsuit, asserting seven separate counts against Wells Fargo, GreatBanc Trust Co., and former Wells Fargo CEO Tim Sloan for breaches of fiduciary duty and engaging in prohibited transactions. The lawsuit, which was filed on Sept. 26, in U.S. District Court for the District of Minnesota, is Lawrence Beville, Et al. v. GreatBanc Trust Company, Et Al.

This suit stems from Wells Fargo 401(k) and employee stock ownership plans. The complaint alleges that plan fiduciaries participated in “corporate self-dealing at the expense of the retirement savings of company employees.” The fiduciaries allegedly did so by overpaying for stock in the employee stock ownership plan. “Each year, going back to at least 2007, up to and including 2018, the plan acquired preferred stock financed by a loan from Wells Fargo,” plaintiffs allege in the complaint. Under the loan’s term, the plan had to use dividends to pay principal and interest on the loan.

The dividend income exceeded the amounts paid on the loans by tens of millions, sometimes hundreds of millions, each year. However, the complaint claims that Wells Fargo used dividend income from Preferred Stock to make its employer matching contributions to the plan, so the plan paid for a dividend it would not receive. “In short, the excess dividend income was used for the benefit of Wells Fargo, not for the benefit of the plan and its participants and beneficiaries,” plaintiffs avow in the complaint.

“ERISA fiduciaries are bound to act with an ‘eye single’ to the interest of the plan participants and beneficiaries to whom they owe a duty,” plaintiffs declare in their complaint. “Defendants in this case violated that bedrock principle by favoring the economic interest of Wells Fargo over those of the Plan and its participants, to whom they owe the highest duties of the law.”

The lawsuit also targets former CEO Tim Sloan. “Sloan used his discretionary authority to take plan assets, reclassified dividends, for the use of Wells Fargo. Such decisions helped the profitability of the company by hundreds of millions annually, which in turn benefited Sloan through various forms of compensation,” the complaint states. Plaintiffs assert that Sloan either knew or should have known that the dividends the exceeded minimum loan payments would be used to defray Wells Fargo’s requirement to match.

Wells Fargo’s 401(k) plan had around $40.8 billion in assets, with 324,314 participants at the end of 2018, according to the complaint. Each year, employees contribute more than $1.5 billion worth of income to the plan.

This lawsuit comes after a federal investigation. The Department of Labor, prompted by the Employee Benefits Security Administration, investigated the Wells Fargo retirement plans. It determined that the 401(k) plan paid between $1,033 and $1,090 per share for Wells Fargo preferred stock when the stock converted to a set value of $1,000 in Wells Fargo common stock when allocated. Transactions between 2013 and 2018 revealed that the plan borrowed money from Wells Fargo to make the purchases. In addition, the investigation uncovered that Wells Fargo used dividends paid on the preferred shares to offset its contractual obligation to contribute to the 401(k).

As a result of the investigation, the Department of Labor recovered more than $131.8 million for retirement plan participants. Wells Fargo also agreed to pay a $13.2 million penalty. After the settlement is paid to the trust, funds will be allocated to affected current and former plan participants. Wells Fargo will stop using the dividends from convertible preferred shares to repay stock purchase loans.

The plan’s trustee was GreatBanc Trust Co. GreatBanc and Wells Fargo agreed to the settlement without admitting or denying the department’s allegations. GreatBanc, as a result of the settlement, can only serve as fiduciary to a public company in connection with a future leveraged transaction involving employee stock ownership, and only if the plan acquires publicly traded stock and pays fair market value.

Labor Secretary Marty Walsh stated, “Our investigation found those responsible for Wells Fargo’s 401(k) plan paid more than fair market value for employer stock and, by doing so, betrayed the trust of the plan’s current and future retirees. Today’s settlement shows the Department of Labor will act when we find retirement assets are misused and benefit plans suffer.”

RELATED: Widower wins insurance dispute

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