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Wells Fargo Wouldn't Be Alone Pushing 401(k) Clients into Proprietary Products

May 1, 2018

The Department of Labor’s investigation into whether Wells Fargo pushed retirement-plan clients into proprietary products shouldn’t surprise anyone, as it’s a longstanding practice among many record keepers, InvestmentNews writes.

The DOL is studying whether Wells Fargo’s retirement plan services unit steered account holders into in-house investment products that benefit the bank and thus violated the Employee Retirement Income Security Act of 1974, according to a Wall Street Journal article cited by InvestmentNews.

But record keepers had been pushing account holders into proprietary products for a long time prior to last year’s partial implementation of the DOL’s fiduciary rule, according to the publication. That’s because record keepers make their profits not so much from record-keeping but from using the record-keeping platform as a distribution channel to get plan participants to buy into their funds, InvestmentNews writes, citing advisors and other industry observers. After all, the largest record keepers, such as Fidelity Investments, Vanguard, Voya Financial and Transamerica Retirement Solutions, also happen to offer mutual funds or insurance products, according to the publication.

Before the DOL’s fiduciary rule went into effect, many record keepers simply acted as non-fiduciary service providers to avoid running afoul of fiduciary obligations, InvestmentNews writes.

“It’s something a lot of record keepers did pre-rule,” Ellen Lander, an advisor at Renaissance Benefit Advisors Group, tells the publication. “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.”

On the other hand, many record keepers have actively embraced the fiduciary rule when dealing with their clients since the DOL rule went into effect, InvestmentNews writes. But that doesn’t change the reality that proprietary products have helped the record keepers’ bottom line for a long time, and will continue to do so, according to the publication.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.