A recent article in the Wall Street Journal reported that Wells Fargo bank was under investigation for practices in the bank’s retirement division. According to the article the investigation focuses on practices intended to move clients into more expensive individual retirement accounts when they retire or leave their jobs. The article also noted that the bank’s retirement plan practices are also under investigation by the Justice Department and the Securities and Exchange Commission.
Of course, an investigation does not mean there was any wrongdoing by Wells Fargo. We will have to wait for these investigations to progress before we have a better understanding of the bank’s actions. However, the very fact that these agencies are undertaking this investigation – when placed into a broader framework – serves as a reminder of some important points:
• Wells Fargo has already paid over one billion dollars in fines for a variety of practices, including opening new accounts in customers’ names without the consent of those customers and forcing customers who bought cars with loans from Wells Fargo to buy unnecessary insurance policies.
The common denominator in these prior scandals was pressure on Wells Fargo employees and managers to produce additional revenue for the bank. Employee reports that emerged from these previous scandals include tales of relentless pressure to sell additional financial products and the termination of employment for failure to meet these sales pressures.
We know that the market for retirement-related products contains some of the same factors as these prior scandals – plan fiduciaries’ focus on plan costs has helped contribute to fee compression and lower fees for in-plan investments. This, in turn, can create significant pressure to find opportunities for financial institutions to “enhance” revenue. And, at the same time, individual products sold outside of employer sponsored plans – such as retail managed accounts and annuities – provide financial institutions a golden opportunity for such revenue enhancement.
• Plan sponsors rely on plan providers to give plan participants financial education and information. And so, with employers’ implicit endorsement, plan providers quickly gain employees’ trust and are well-positioned to steer employees to products that are lucrative-for the provider (but not necessarily for the employee).
• Employers are concerned with plan “leakage” and have expressed bafflement at why retiring employees choose to roll over large balances, from well-run employer plans into more expensive retail products. However, these same employers have not taken a hard look at the compensation structures utilized by plan providers – compensation structures that may provide minimal compensation to service the employer-sponsored plan and lucrative commissions for amounts rolled out of the plan. In effect, the root causes of plan leakage are right before employers’ eyes, but employers have not recognized how provider compensation structures contribute to plan leakage.
• Regulatory oversight over provider practices and compensation structures is in a state of disarray. The DOL’s proposal to expand the scope of ERISA’s fiduciary rule is in limbo as the result of the decision by the Fifth Circuit in Chamber of Commerce v Acosta and it does not look like the DOL proposal is going to be implemented any time soon. And, the SEC’s recent proposal regarding broker-dealer conduct fails to require that broker-dealers actually act in customers’ best interests. The proposed rule still allows a broker-dealer to make recommendations that are heavily influenced by the broker-dealers economic self-interest; under the proposed rule a broker-dealer can consider their own economic interests to be as significant as the customer’s interests.