The disclosure of an alleged Labor Department investigation of Wells Fargo sales practices — including those in its retirement-plan services division — is sure to raise a few eyebrows, but should this sort of thing really be a revelation to anyone in the 401(k) industry?
The Wall Street Journal
reported Thursday that the Department of Labor is looking into, among other things, "whether Wells Fargo's retirement-plan services unit pressed account holders to buy in-house funds, generating more revenue to the bank."
The article suggests the DOL is investigating potential violations of the Employee Retirement Income Security Act of 1974, which prohibits fiduciaries from self-dealing.
Regardless of what Wells Fargo may or may not have done, let's not fool ourselves. Pushing proprietary products — both in 401(k) plans and to participants rolling over 401(k) money into an individual retirement account — is something that many record keepers have engaged in for quite some time. It's just that companies were largely able to escape scrutiny prior to the DOL fiduciary rule coming into effect, because they had broad latitude to engage in such conduct without breaking the rules.
Advisers and other observers often say that it's not the actual record keeping that's profitable to retirement-plan providers; the record-keeping platform is more of a distribution arm to get participants to (hopefully) invest in their funds. Record keepers also benefit from interaction with participants — often via a call center — looking to roll over their 401(k) money when they retire or change jobs; the hope is such interactions will lead to money flowing to in-house IRA funds.
It's not a coincidence that most of the big record keepers are companies that sell mutual funds or insurance products like stable-value funds — think Fidelity Investments, Vanguard Group, Voya Financial Inc. and Transamerica Retirement Solutions.
Prior to the fiduciary rule coming into effect in June, many record keepers would more aggressively try steering plans and participants to adopt proprietary funds.
"It's something a lot of record keepers did pre-rule," said Ellen Lander, an adviser at Renaissance Benefit Advisors Group.
Prior to the rule, which raises investment advice standards in retirement accounts, record keepers generally held themselves out as non-fiduciary service providers to avoid the associated fiduciary liability.
"If the record keeper isn't a fiduciary, they don't have a legal obligation to say their products are more expensive or they don't perform as well," Ms. Lander said.
If there is a DOL investigation, it's not clear if it is into conduct before or after the DOL fiduciary rule went into effect.
Wells Fargo is currently conducting an independent investigation of its Wealth and Investment Management business, which includes its retirement business, on
instructions from the Department of Justice.
When asked to comment, spokeswoman Leslie Ingberg said Wells Fargo's top priority is rebuilding trust with stakeholders. "We are committed to thorough reviews of Wealth and Investment Management, per our 10-K disclosures, to their full conclusion," she said. "We are making significant progress in our work to identify and fix any issues, make things right, and build a better, stronger company."
If I were a betting man, my money would be on an examination of Wells Fargo's conduct prior to the rule, since the DOL has said it's
not enforcing the fiduciary regulation at this time.
In that case, the investigation would likely hinge on whether Wells Fargo was, in the DOL's view, making recommendations as a fiduciary to invest in proprietary products during the more lax pre-rule period.
For what it's worth, many record keepers
have changed their conduct in light of the fiduciary rule, which makes it much more challenging for record keepers to steer participants into proprietary investments. Some are
actively embracing a fiduciary role in their client interactions.
I'm not trying to paint a view that all record keepers are evil, greedy corporations consistently looking to make a buck at the expense of plans and their participants. But, regardless of the outcome of the investigation, we shouldn't be blind to the fact that proprietary funds have for a long time been, and will continue to be, important to record keepers' livelihood.
