Autopsy of a Failed ERISA Class Action: Wells Fargo
The actions of a person or party characterized as a fiduciary must demonstrate more than what is perceived to be fair and honest. They must constrain from pursuing self-interest. All behaviors and methodologies that produce outcomes must only be for the sole benefit of the beneficiary of the assets. This the nature of the relationship that exists between Plan Sponsor and participants defined by ERISA.
In Tibble vs Edison International, The Supreme Court reminded us that ERISA’s fiduciary duty is derived from the law of trusts. As to how investments are chosen and monitored, ERISA does not offer any specifics but, like Trust Law, duty is ongoing and cannot be fulfilled unless a prudent process is in place. Poor outcomes materialize when there isn’t a prudent process in place.
Yet in Meiners vs. Wells Fargo, allegations seem to be a critique of results as opposed to the process. For example, this seems to be apparent in the plaintiff’s allegations that Wells Fargo’s investment fees (pertaining to their Target Date Funds/Investments) were much higher than their Vanguard or Fidelity counterparts. This seemed rather “hollow” because no real evidence was offered that the decision to choose these Wells Fargo investments were based on self- interest or even a poor methodology.
If one were to partake in a postmortem examination to discover the origins of failure, poor results rooted in a lack of subject matter expertise is difficult to overlook. To be specific, the subject that should have been mastered first is not law but Wealth Management/Portfolio Construction. It would have been evident in the allegations such as Breach of Fiduciary Duty of Prudence; No viable methodology was applied to choose investments but, like many ERISA Class Actions pertaining to Employer Sponsored Retirement Plans, it wasn’t.
Although not the only theory nor discounting how it’s applied, Modern Portfolio Theory (MPT) would have been a good place to start as to reverse engineering a methodology if there was one. If the many indicators utilized in MPT did not favor the Wells Fargo Target Funds/Investments relative to others that were available, what methodology did the Plan Sponsor use to choose them?
I’d imagine if performance, expenses, and volatility are relatively lacking, individually or in tandem, the rationale for utilizing these investments fails as fast as the methodology that chose them. If poor outcomes are correctly ledgered and evidenced under their respective allegations and consistent with the spirit of Trust Law and ERISA, then flawed methodologies and decision-making is the culprit.
I find it interesting that successful defenses in Class Action ERISA cases concerning Employer Sponsor Retirement Plans always recognize allegations without mention to processes. Perhaps it’s a topic that needs to be explored further.