Wells Fargo's 401(k) Practices Probed by Labor Department -- Update
April 26 2018 - 12:33PM
Dow Jones News
By Gretchen Morgenson and Emily Glazer
The Labor Department is examining whether Wells Fargo & Co.
has been pushing participants in low-cost corporate 401(k) plans to
roll their holdings into more expensive individual retirement
accounts at the bank, according to a person familiar with the
inquiry.
Labor Department investigators also are interested in whether
Wells Fargo's retirement-plan services unit pressed account holders
to buy in-house funds, generating more revenue to the bank, the
person said.
A new federal investigation is unwelcome news for Wells Fargo,
which has been dealing with an array of regulatory issues over the
past two years. Just last week, it agreed to pay a $1 billion fine
over claims of misconduct in its auto and mortgage lending
businesses.
At issue in the Labor Department's investigation is how Wells
Fargo handles its clients' retirement savings. Under the Employee
Retirement Income Security Act, entities that serve these accounts
are supposed to put their clients' interests ahead of their
own.
Wells Fargo managers have pressed employees in the bank's
retirement division to recommend that clients open more expensive
individual retirement accounts when they retire or leave their
jobs, according to another person familiar with the bank's
operation.
The bank gives employees asset retention goals intended to keep
these retirement accounts in-house, this person said, adding that
Wells Fargo workers often generated higher fees for the bank by
putting clients into mutual-fund shares that carried a front-end
"load," or fee.
A Labor Department spokesman didn't respond to a request for
comment. Its Employee Benefits Security Administration enforces the
Erisa law with the Internal Revenue Service and the Pension Benefit
Guaranty Corporation.
There are two types of penalties for Erisa violations. Civil
penalties may include fines or a requirement that an entity change
its procedures or make a payment to a plan beneficiary. Criminal
penalties may involve fines as well as imprisonment.
In a statement, Wells Fargo said the company is "committed to
thorough reviews of Wealth and Investment Management," adding: "We
are making significant progress in our work to identify and fix any
issues, make things right, and build a better, stronger
company."
In its annual financial report filed last month, Wells Fargo
referred briefly to new federal inquiries involving practices in
its 401(k) plan rollover business.
The bank said its board is reviewing certain activities to
assess "whether there have been inappropriate referrals or
recommendations, including with respect to rollovers for 401(k)
plan participants, certain alternative investments, or referrals of
brokerage customers to the company's investment and fiduciary
services business"; the review is at a preliminary stage.
The Justice Department and the Securities and Exchange
Commission also are examining the bank's retirement-plan practices
alongside a broader sales practices probe, people familiar with the
matter said.
A whistleblower has come forward to speak with regulators about
Wells Fargo's IRA rollover activities, according to the person
familiar with the inquiry, alleging that the bank breached its
fiduciary duties to clients.
Wells Fargo's Institutional Retirement and Trust division offers
record-keeping, trustee and custody services to corporations
providing 401(k) plans to their employees. Among the companies
whose 401(k) plans are served by Wells Fargo are Cardinal Health,
Caleres, Inc., a shoe manufacturer, and the Lowe's Companies,
regulatory filings show.
Wells Fargo advisers make recommendations for clients on a
variety of platforms with investment options. One of those Wells
Fargo platforms for managed mutual-fund asset allocation includes
the bank's proprietary products and other offerings. In recent
months, Wells Fargo lowered the fees for some of its 401(k) plan
products, current employees said.
Wells Fargo isn't alone in working to hang onto customer assets
in 401(k) plans. Other banks, including Morgan Stanley, have
programs aimed at rolling over existing 401(k) plans into IRAs
using proprietary products or third-party offerings that have
revenue-sharing agreements that generate fees to the firm. Bank of
America Corp.'s Merrill Lynch used to have a similar program but
changed it in June 2017 in anticipation of new DOL rules governing
fiduciary duty.
The Labor Department's investigation is the latest regulatory
headache for Wells Fargo.
Last week, the bank said it had agreed to pay $1 billion to
settle with regulators at the Consumer Financial Protection Bureau
and the Office of the Comptroller of the Currency. The fine centers
on the bank's failure to manage risk, including its yearslong
practice of forcing tens of thousands of borrowers to buy car
insurance they didn't need as well as improprieties involving
mortgage loan rate-locks.
Write to Gretchen Morgenson at gretchen.morgenson@wsj.com and
Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
April 26, 2018 12:18 ET (16:18 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.