On February 21, 2019 attorneys for Andrew Wong, a participant in the T-Mobile USA Inc. 401(k) Retirement Savings Plan & Trust, filed a class action complaint in the U.S. District Court of Massachusetts against FMR LLC, Fidelity Management Research Company, Fidelity Management Trust Company and several other affiliates. The basis for the lawsuit relates to certain payments charged by Fidelity to non-Fidelity mutual fund managers and other advisors as a charge to allow the outside funds to be offered to Fidelity retirement plan customers on the “Fidelity Funds Network”. The complaint alleges that the fees commenced in or about 2017 when a number of major mutual funds reduced the internal management fees on their institutional funds, reducing the amount of fund revenue sharing available to be shared with platform providers like Fidelity.
The complaint alleges that these negotiated fees, which the outside fund managers or advisors were contractually prohibited from disclosing to the retirement plans investing in the mutual funds, violate ERISA’s prohibited transaction rules, fiduciary obligations and self-dealing prohibitions.
In 2012, the Department of Labor issued regulations under ERISA Section 408(b)(2), 29 CFR Section 2550.408b-2, which requires certain covered entities (including fiduciaries) serving ERISA-regulated retirement plans to provide full disclosure to plan fiduciaries of both direct and indirect compensation paid from the assets in the plan. The plaintiffs, which purport to be not only the T-Mobile plan, but all similarly situated plans (potentially over 25,000 plans), allege that these kickback platform fees should have been separately disclosed to the fiduciaries as part of total plan costs. The theory presented by the plaintiffs is that Fidelity is receiving additional undisclosed revenue from the management of customer retirement plans related to the amount of assets held in custody on its platform.
Even if the payments were properly disclosed, the plaintiffs allege that arrangement for the payments amounts to self-dealing by Fidelity and the receipt of compensation that the plaintiffs argue is unrelated to the cost or value of the services provided.
These claims are at this time only part of a complaint filed in the US District Court. If the plaintiff is successful in having his case certified as a class action, fiduciaries of tens of thousands of other plans serviced by Fidelity’s recordkeeping and investment custody services will be asked whether to join as class plaintiffs in the lawsuit. The Wall Street Journal reported at the end of February that the Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor is investigating Fidelity’s “infrastructure fees” and contracts with outside fund managers and advisors.
ERISA has strict requirements for parties in interest (service providers) and fiduciaries (persons and entities with discretion over the use of plan assets). These rules require disclosure, reasonableness in the case of fees, the avoidance of conflicts of interest and self-dealing. The complaint alleges that all of these were violated by the existence of these confidential agreements and the millions of dollars received by Fidelity for undisclosed services.
This case will be of interest to trustees and members of fiduciary committees of 401(k) plans, particularly those utilizing Fidelity’s services. Fidelity denies that no disclosure was made and denies that the fees are in violation of ERISA. Fidelity intends to fight these allegations vigorously.
We will keep you updated as this case proceeds through the courts.