19 November 2018

Wells Fargo 401k Labor Practices Probed By Labor Department

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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.’sMerrill 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.

Click here for the original article from The Wall Street Journal.

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