Another 401(k) plan participant has slammed the parent company of Fidelity Investments and several of its affiliates with a lawsuit claiming the record keeper secretly charged mutual fund companies a fee for having their funds on Fidelity's platform.
The plaintiff, Jason Bailis, alleged that the purported secret payments increased the expense ratios and other expenses of the mutual funds, which were then deducted directly from the assets of his company's 401(k) plan, according to the lawsuit filed April 5 in U.S. District Court in Massachusetts.
Mr. Bailis, a participant in the $2.7 billion 401(k) plan of Publicis Benefits Connection, filed the lawsuit on behalf of participants in the Publicis plan and and all employee benefit plans covered by ERISA with which Fidelity has a contractual relationship.
The plaintiff alleged that beginning in 2017 Fidelity started requiring various mutual funds to make kickback payments to Fidelity for its own benefit in the guise of "infrastructure fees" in violation of ERISA's prohibited transaction rules.
"Although these secret payments clearly constitute indirect compensation that Fidelity is required to disclose to the plans under ERISA ... Fidelity does not disclose the amount of these secret payments, amounting to at least tens of millions of dollars per annum and likely in the hundreds of millions of dollars per annum, to the plans and forbids the mutual funds from disclosing the amount of these secret payments, despite their legal obligation to do so," the attorneys for Mr. Bailis claimed in the lawsuit.
The plaintiff also alleged that the payments, which Fidelity characterized as infrastructure payments, were "plainly a replacement for declining amounts of revenue-sharing payments received by Fidelity."
Michael Aalto, a spokesman for Fidelity, denied the allegations, saying that Fidelity fully complies with all disclosure requirements in connection with the fees that it charges. "The infrastructure fee has been fully disclosed to 401(k) plans and their sponsors via a disclosure that Fidelity sent to over 20,000 401(k) plans, pursuant to Section 408(b)(2) of ERISA," he said in an email.
Mr. Aalto also noted that Fidelity makes thousands of non-Fidelity mutual funds available to 401(k) plans for which Fidelity acts as record keeper, as well as to other Fidelity customers. "We receive a fee from some of those mutual fund companies to compensate us for maintaining the infrastructure that is needed to make those funds available," he said.
The lawsuit follows similar suits filed by a participant in a T-Mobile USA 401(k) plan in February and by 401(k) participants in three separate plans — Rock Holdings & Associated Companies 401(k) Savings Plan, Cadence Health Matched Savings Plan and Blue Shield of California Tax-Deferred Salary Investment Plan — in March.
The firm is also being investigated by William Francis Galvin, the secretary of the commonwealth of Massachusetts, which in February 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 plaintiff in the latest Fidelity lawsuit is seeking declarative and injunctive relief as well as compensatory damages and disgorgement and/or restitution for "all the kickback payments and other compensation improperly received by Fidelity."
