This week, the U.S. Department of Labor (DOL) announced a settlement in an Employee Retirement Income Security Act of 1974 (ERISA) case where Wells Fargo will pay $131.8 million for ERISA violations. According to the DOL investigation, Wells Fargo, Wells Fargo Bank, and GreatBanc Trust Company (a plan trustee) caused the company’s dedicated plan fund to overpay for company stock purchased for its 401(k) plan. The ERISA violations occurred from 2013 through 2018. Employee records containing benefit information aided investigators in this case. Under ERISA, employers must retain such records for at least six years. Earlier, in September 2022, the DOL announced a separate ruling in which Wells Fargo will pay $22 million in a whistleblower retaliation lawsuit.

Background of the ERISA Violations

The DOL’s Employee Benefits Security Administration (EBSA) found that the plan trustee caused the 401(k) plan to pay between $1,033 and $1,090 per share of Wells Fargo preferred stock, which was specifically designed for the plan. However, when allocated to participants, the stock converted to a set value of only $1,000 in common stock. In other words, the plan trustee made the plan pay more for company stock than it would be worth when distributed to participants.

What’s more, EBSA investigators also found that the trustee used the dividends paid on the plan’s preferred shares to defray contributions to the plan, instead using the dividends to repay the stock purchase loans. In brief, the transaction caused the plan to pay more for each share than the plan participants would receive. In the end, both actions constituted ERISA violations.

ERISA Fair Market Value Rule and Prohibited Transactions

Under ERISA, the value of a company’s 401(k) plan assets considers fair market value. Specifically, fair market value is the price at which an asset would change hands between a willing buyer and a willing seller when either party is not compelled to enter into the transaction. Section 303 of ERISA states that a plan trustee must determine the value of a plan based on:

  • the fair market value of the plan assets, or
  • the averaging of fair market values if the method does not result in a value of the plan assets lower than 90% or greater than 110% of the fair market value of such assets at such time.

Additionally, ERISA limits the kinds of securities a plan may invest in. Section 407 of ERISA states that a plan may only invest in qualifying employer securities. Qualifying employer securities include company stocks and other equity securities.

Furthermore, Sections 406(a) and (b) of ERISA bar specific transactions between a plan and a party of interest concerning the plan. Under Section 406(a), a plan trustee may not cause a plan to enter into a transaction if the transaction is an unauthorized transfer or use of any plan assets. Additionally, Section 406(b) states that a fiduciary may not:

  • deal with the assets of the plan in their own interest or for their own account,
  • act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or
  • receive any consideration for their own personal account from any party dealing with such plan in connection with a transaction involving the plan’s assets.

Retirement Settlement for the ERISA Violation

To settle the ERISA violations case, Wells Fargo will pay $131.8 million into a trust which will be distributed to current and former participants affected by these illegal transactions. Wells Fargo will then redeem the remaining preferred stock for common stock. Furthermore, they will no longer use dividends from the preferred shares to repay stock purchase loans. Wells Fargo will also pay $13.2 million in penalties. Meanwhile, GreatBanc will no longer act as a fiduciary to any public company in a transaction that involves stock ownership. This is unless it deals only with publicly traded stock and the plan pays no more than fair market value.