A recent spate of fiduciary breach lawsuits against Fidelity Investments represents a new strategy by plaintiffs' attorneys to identify alleged ERISA violations affecting defined contribution plans, industry observers say.
The litigation argues that Fidelity violated ERISA through offering competitors' mutual funds to Fidelity clients. The lawsuits by current and former DC plan participants focus on the adequacy of fee disclosure and whether record keepers are considered defined contribution fiduciaries.
Plaintiffs alleged that Fidelity is a fiduciary and is charging "secret" fees; Fidelity responded that it discloses the fees and that it isn't a fiduciary.
Lawsuits filed in February, March and April argued that Fidelity's management of its Fidelity FundsNetwork makes it subject to ERISA rules governing fee transparency and self-dealing. These lawsuits have been consolidated into a single class-action complaint, In Re Fidelity ERISA Fee Litigation. The participants' complaints were filed on behalf of respective DC plans as well as "similarly situated" DC plans. However, the plans are neither plaintiffs nor defendants.
The FundsNetwork is an open architecture investment platform that Fidelity makes available to competing asset managers that provide their products to Fidelity's DC clients. Fidelity charges "infrastructure fees" to some of these providers so it can maintain the FundsNetwork platform, the company wrote in a July 1 response to the lawsuits. The FundsNetwork connects "hundreds of asset management companies offering a total of over 10,000 mutual funds" to Fidelity investors, the company wrote.
Plan participants accused Fidelity of operating a "secret" payment "kickback" scheme by charging and manipulating fees to mutual fund providers.
"Fidelity's receipt of the kickback payments at issue violates ERISA's prohibited transaction and fiduciary duty rules and should not be countenanced," said the consolidated complaint filed May 15 in a U.S. District Court in Boston. The consolidated complaint lists 10 lawyers in six law firms representing current or former participants in 11 defined contribution plans.
"The secret payments do not bear any relationship to the services performed by Fidelity," said the complaint, adding that the infrastructure payments are made "at the expense of the plans and participants." The complaint said fees charged by mutual fund companies to DC plans would be higher due to their paying the infrastructure fees.
Fidelity's July 1 response asked that the lawsuit be dismissed. The infrastructure fees "were heavily negotiated with the fund managers" and the fees were "disclosed to all investors," Fidelity wrote.