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March 20, 2019 01:00 AM

Fidelity faces another lawsuit over 401(k) fees

Margarida Correia
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    The parent company of Fidelity Investments and several of its affiliates have been hit with another lawsuit by 401(k) plan participants claiming the record keeper secretly charged mutual fund companies a fee for having their funds on Fidelity's platform.

    In the lawsuit filed Monday in U.S. District Court in Massachusetts, the 401(k) participants alleged that the purported undisclosed pay-to-play fee drove up expense ratios, causing them to "pay more in fees and receive lower returns on their investments."

    The three plaintiffs, each participants in separate 401(k) plans serviced by Fidelity, accused the record keeper of breaching its fiduciary duties to the plans by charging the fees. They also faulted Fidelity for instructing participating mutual funds not to disclose the fee to any third party, including plan sponsors, plan beneficiaries and the public.

    "Fidelity's assessment of the fee constitutes self-dealing that violates Fidelity's fiduciary duties and ERISA's prohibited transaction rule," the attorneys for the plaintiffs claimed in the lawsuit.

    The plaintiffs also disputed Fidelity's characterization of the fee as an infrastructure fee, saying it bears no meaningful relationship to any infrastructure maintenance by Fidelity.

    "Fidelity emphatically denies the allegations in this complaint and intends to defend against this lawsuit vigorously," said Michael Aalto, a spokesman for Fidelity, in an email. Mr. Aalto also denied allegations that the company failed to disclose the fees, saying the claims were "not only misleading but simply false."

    The lawsuit follows a similar suit filed last month by a participant in a T-Mobile USA 401(k) plan against FMR LLC, the parent company of Fidelity Investments, and several FMR affiliates. The plaintiff in that case alleged that the fees charged by Fidelity to funds on its platform represented indirect compensation that Fidelity is required to disclose to defined contribution plans under the terms of the Employee Retirement Income Security Act.

    The firm is also being investigated by William Francis Galvin, the secretary of the commonwealth of Massachusetts, which last month sent a preliminary inquiry letter to Fidelity and certain funds on its platform asking about its fee practices, according to Mr. Galvin's office.

    The plaintiffs in the latest Fidelity lawsuit are seeking class-action status as well as injunctive relief and awards for damages, restitution and disgorgement. The three plaintiffs are Gina Summers, a participant in the $771 million Rock Holdings & Associated Companies 401(k) Savings Plan, Detroit; Cynthia Eddy, a participant in the $362 million Cadence Health Matched Savings Plan, Winfield, Ill.; and Kayla Jones, a participant in the $682 million Blue Shield of California Tax-Deferred Salary Investment Plan, San Francisco.

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