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Wells Fargo (WFC) Sued by Plaintiff Over Target Date Funds

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Troubles heap on the U.S. banking giant Wells Fargo & Company (WFC - Free Report) , which faces a new class action lawsuit, alleging the bank of enriching itself at the cost of its employees’ retirement savings by including costly, in-house target date funds in its 401(k) plan. The plan has nearly $35 billion in assets and more than 350,000 participants, as mentioned by the plaintiff.

The lawsuit, first reported by Reuters, was filed in a Minnesota federal court last week. The lawsuit accuses Wells Fargo of "self-dealing and imprudent investing" by misrouting more than $3 billion of 401(k) contributions to its Wells Fargo Dow Jones Target Date funds. The bank intentionally boosted its proprietary mutual funds’ assets by making its target date funds a default investment option through an "easy" and "quick" enrolment process. These funds carried fees 2.5 times more than its peers such as Fidelity Investments and Vanguard Group, and consistently underperformed them.

Further, the plaintiff claims that the difference in fees was due to additional layer of fees levied to run the funds, besides the fees charged to manage the underlying indexed funds. These made them substantially costlier than the fees charged by the comparable target date funds. Notably, Wells Fargo target date funds – also known as lifecycle funds – provide a shifting balance of bonds, stocks and cash equivalents to suit a participant’s projected retirement date.

This steering of contributions generated substantial revenue for Wells Fargo and became an important source of seed capital to keep the funds afloat by pumping market share. Conversely, Wells Fargo employees could have earned an extra $323 million in returns, if the company had offered Vanguard’s style of target date funds.

The lawsuit seeks to recoup unrealized profits and extra fees generated from the bank’s breach of fiduciary duties to all 401(k) participants over the last six years.

Over the past years, many class action lawsuits have sued financial companies that offer in-house investment products in their 401(k) plans. In 2016, BB&T Corp. and Deutsche Bank AG (DB - Free Report) faced denial by the court to dismiss the case against mismanagement of the company’s defined contribution plan. A similar case is also pending against the New York banking giant – Morgan Stanley (MS - Free Report) – involving more than 60,000 participants.

Bottom Line

Crisis has been encompassing Wells Fargo since the exposure of the fraudulent sales scandal. The bank’s employees were alleged of illegally opening nearly 1.5 million of unauthorized deposit accounts to fulfill their sales quotas. The allegation led to many setbacks, involving the bank’s shattered image, numerous lawsuits, triggered federal and state investigations, Congressional hearings and the bank’s former CEO – John Stumpf – stepping down from his job.

Shares of Wells Fargo have declined more than 3% so far this year, underperforming 12.9% gain of the Zacks categorized Major Regional Bank industry.

While the current crisis at Wells Fargo will take some time to alleviate, we believe that continued growth in loans and deposits, solid business mix, improving credit quality and expansion moves should support its growth profile, going forward.

Wells Fargo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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