Summary
* Another scandal hits Wells Fargo due to the mishandling of retirement funds.
* The bank will pay a $32.5 million settlement to employees.
* The settlement is a victory for the plaintiffs but doesn't dent Wells Fargo's massive balance sheet.
Wells Fargo (NYSE: WFC) has been courting scandals in recent years. First, it was involved in a scandal that involved employees operating fake accounts to beat sales targets. The total cost of those scandals by 2021 for the company amounted to $2.2 billion. This time, the scandal involves retirement funds. It will have to pay a settlement claim for handling employees' 401(k) plan.
On Wednesday, Wells Fargo (NYSE: WFC) agreed to pay about $32.5 million to settle a lawsuit dragging on for two years. The company is accused of mishandling its 401(k) plan for employees through self-dealing. The lawsuit started in March 2020. It contends that Wells Fargo breached its fiduciary duty to its employees with its retirement plan by investing the money in funds tied to the company to benefit the company. In addition, those funds are alleged to have higher fees and were underperforming compared with other retirement products.
The $32.5 million agreement will pay for 40% of the plan participants' estimated damages. The retirement savings of Wells Fargo employees were mismanaged for the company to derive revenue. Wells Fargo violated the bedrock principle by favoring its economic interest over those to whom it had the highest duty to favor, the employees.
This case is one in a series of recent court cases that have pitted employees against employers due to the mishandling of retirement funds. Most employees hold that major fund companies do not comply with the Employee Retirement Income Security Act or Erisa. Well, I can't say for sure why they decided to withhold employees' 401(k) initially. But what I do know is that this cash is reflected on their balance sheet. Over the period of 3 years, ending in 2019, they've increased their asset holding by $8.3 billion.
So should you be bothered about this latest settlement plan? My answer is No. Why?
The Settlement Not Even A Dent On Wells Fargo’s Balance Sheet
Although the plaintiffs scored a significant victory in making Wells Fargo accountable for violation of its fiduciary duty, the settlement does not make a dent in the company's balance sheet. Wells Fargo (NYSE: WFC) ranks among the top five banks in the United States, with assets worth $24.6 billion. Its revenue for 2021 was $20.856 billion with a net income of $5.75, making it the fourth-largest bank in America by revenue. Adjusted earnings per share were $1.25, which beat consensus estimates of $1.13.
The company has a vast retail banking network complemented by a large deposit base. Its business has increased due to increased banking industry rates that involve charging extra for loans and therefore fattening its profit margins. The bank’s stock was the best among banking stocks for the fiscal year 2021, growing at 59% year over year, and this year, the run has continued due to the surging interest rates.
Therefore, making a settlement of $32.5 million would not make a dent in the bank’s balance sheet. But it underscores one point. Employees are making fund companies accountable for mishandling retirement funds, and the settlement amount might go higher if Wells Fargo does not change its practices. The bank has not addressed the claims made in the lawsuit.
Wells Fargo(NYSE: WFC)is up 4.54% over the past month. In this period of rising inflation, adding this stock to your portfolio is a big flex. A low P/E ratio of 9.68 attests to this fact. Why I stay bullish on Wells Fargo is because of its upcoming earnings call expected to be on April 14th. It is expected to beat consensus. Would you still hold your Wells Fargo (NYSE: WFC) stock? Or are you still thinking of dumping? Let us know in the comment section below.
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