Lawsuit alleges UnitedHealth Group mismanaged investment options in worker retirement plan

An amended lawsuit alleges the chief financial officer at UnitedHealth Group was motivated by his company’s significant business relationships with Wells Fargo when he pushed to retain the bank’s low-performing investment funds in the employee 401(k) plan.

First filed in April 2021, the class action complaint was updated this month to list UnitedHealth Group CFO John Rex as a defendant. It added allegations that the executive intervened and blocked a decision to remove the Wells Fargo funds despite concerns from the retirement plan’s investment committee and an outside consultant.

About 200,000 employees, former employees and their beneficiaries invest in the UnitedHealth Group 401(k) savings plan.

The lawsuit alleges that “poor performance” by the Wells Fargo funds between 2011 and 2015 cost the plan and its participants more than $100 million in lost retirement savings. At the end of 2020, the master trust at UnitedHealth Group invested more than $8 billion, or nearly half its assets, in the Wells Fargo Target Fund Suite, the complaint says.

“UnitedHealth did not use its leverage to identify and select prudent target date options for plan participants,” the lawsuit states. “Instead, UnitedHealth used plan assets as leverage to bolster its business relationships.”

UnitedHealth Group has defended the investment strategy behind selecting the funds from Wells Fargo, which declined to comment.

In a statement last week, UnitedHealth said there was no basis for adding Rex as an individual defendant. The company called allegations against the CFO “completely without merit” and said on Friday: “It should surprise nobody that UnitedHealth Group has business relationships with thousands of companies, including many financial institutions.”

UnitedHealth added the Wells Fargo Target Fund Suite as an option in the employee retirement savings plan in 2010, according to the lawsuit.

Called target date funds, they are tailored for different groups of investors based on their retirement date. The funds are increasingly popular with investors and rebalance assets over time so they are less focused on growth as investors near retirement age.

The Wells Fargo funds were the default option when employees did not make investment elections. They also were the only target date options within the plan from 2010 to 2021, according to the complaint.

By October 2014, the retirement plan’s independent investment consultant, Mercer, was expressing concern about the performance of the Wells Fargo funds and pushed for the evaluation of alternatives, according to the lawsuit. The company’s investment committee agreed by 2016, the complaint says, that a different target date fund provider should be selected.

But Rex, the chief financial officer, “knew that Wells Fargo was a key business partner of UnitedHealth: a so-called jumbo customer, a major lender, and a main underwriter for its business,” the lawsuit says.

“At CFO Rex’s direction, the investment committee excluded the plan’s investment consultant, Mercer, from key meetings that resulted in the decision to retain Wells Fargo, including the final interview with Wells Fargo and the other target date providers,” the lawsuit says. “Meanwhile, the investment committee abruptly stopped documenting its target date selection process and maintained no contemporaneous records for the key meetings that resulted in the decision to retain Wells Fargo.

“Behind closed doors, the fix was in to retain Wells Fargo,” the lawsuit asserts.

The lawsuit says Rex had his staff develop a spreadsheet showing fees that Minnetonka-based UnitedHealth was paying to, and receiving from, six different companies that could offer target date investment funds.

“The data confirmed that Wells Fargo was a far more profitable customer for UnitedHealth than the other target date candidates,” says the complaint filed last week in the U.S. District Court of Minnesota. “Soon afterwards, internal correspondence warned that if Wells Fargo was not selected, there would likely be an escalation to the chairman of the board of UnitedHealth, Stephen J. Hemsley, and UnitedHealth’s CEO David S. Wichmann.”

In June 2021, UnitedHealth Group filed a motion to dismiss the case. The company argued that while the retirement savings plan lets workers select riskier options, it made the target funds the default choice because they “exchanged some of the potential for higher equity gains for downside protection in times of market trouble.”

The plan adopted this conservative strategy in the years after the 2008 financial crisis, UnitedHealth Group said, when many Americans saw large declines in retirement savings.

“Enterprising lawyers may choose to pursue baseless claims, but nothing in the law supports using hindsight and apples-to-oranges comparisons to question good faith investment decisions made in the best interests of retirement plan participants, which generated hundreds of millions of dollars in retirement income for our employees while reasonably aiming to protect them from outsize losses in bear markets,” the company said in a statement.

In December, U.S. District Court Judge John Tunheim ruled the class action case could go forward, denying the company’s motions for both a dismissal and summary judgment. A trial has been scheduled for February 2024.

The judge wrote that the complaint “demonstrated that there was long-term underperformance of the Wells Fargo [funds] in comparison to meaningful benchmarks, which plausibly raises an inference of imprudence and is sufficient to survive a motion to dismiss.”

UnitedHealth Group has not yet responded in court to allegations from last week’s filing.

In last year’s motion to dismiss, the company argued the Wells Fargo funds delivered “billions of dollars in positive returns” based on a strategy that factored the longer life expectancy and lower savings rate of plan participants. In addition to securing lower fees, retirement plan managers worked with Wells Fargo to make changes in 2017 that show they were “not asleep at the wheel,” the company said in the court filing.