Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Mutual Funds

Fidelity faces class-action over its own plan

Your article was successfully shared with the contacts you provided.

A class-action lawsuit against Fidelity Investments alleging it had a conflict of interest in directing its employees into a more expensive 401(k) account has drawn the attention of asset managers and retirement law experts nationwide.

The lawsuit, filed in Fidelity’s home state of Massachusetts in March by Lori Bilewicz, a former Fidelity employee, was joined this month by 26 other plaintiffs. The suit claims Fidelity Management and Research limited employees to investing in its own funds, which charged higher fees than comparable vehicles available from other firms.

“This should sound a warning to every asset manager,” said Marcia Wagner, principal of the Wagner Law Group in Boston. “Name your favorite company. … They should be consulting an ERISA attorney and making sure they are doing everything right.”

Related story: Fidelity reports rising satisfaction with 401(k) advisors

Along with claims about the expense, Bilewicz’s suit asserts that the number of investment funds available in the plan was overly broad. It offered many more funds, more than 150, than is usual for the industry, the suit said. All of the funds offered were managed by Fidelity.

The plan had 55,862 participants as of Dec. 31, 2011, with a total of $8.5 billion in assets.

The plaintiffs alleged that Fidelity loaded up the menu with its own funds so that at the end of 2010, 88 percent of the plan’s mutual funds comprised actively managed proprietary funds. Those funds accounted for 84 percent of the plan’s assets, the plaintiffs claimed.

Bilewicz claimed that though Fidelity launched an index-based suite of target date funds in 2009, these options weren’t available on the company’s own 401(k).

The difference in cost was stark, according to the suit: The index-based funds had average investment management fees of 9 basis points, 83 percent lower than the average cost of the Fidelity Freedom Fund K shares that the plan used.  

“What are the odds if you were a fiduciary pursuing best-of-breed funds that you would end up with all the funds from the same vendor?” asked Bilewicz’s attorney, Gregory Y. Porter of Bailey & Glasser in Washington, D.C.

In its defense, Fidelity counters that two “Courts of Appeal have endorsed very similar lineups offered by plan sponsors unaffiliated with Fidelity.”

“The lawsuit is totally without merit and we intend to defend vigorously against it,” said Vincent Loporchio, a Fidelity spokesman. “Fidelity’s funds are long-recognized by the industry as having low fees.”

Loporchio pointed out, “Fidelity has generous benefits package that provides significant contributions to employees’ retirement planning, including a profit-sharing contribution, a significant 401(k) match and contributions to help fund employee health expenses in retirement.”

“Fidelity is the world’s largest manager of retirement asset. Its mutual funds are widely utilized in hundreds of thousands of unaffiliated 401(k) plans. There is no reason why Fidelity’s Plan could not – or would not – do the same,” he said.

The suit claims FMR and the FMR Investment Committee engaged in “self-dealing at the expense of its own worker’s retirement savings … funds were not selected and retained as the result of an impartial or prudent process, but were instead selected and retained by FMR as investment options in the Plan because FMR, its subsidiaries, and its owners benefited financially from the inclusion of these investment options.”

The lawsuit further claims, “By deluging the Plan’s investment option menu with an overwhelming array of often-overlapping funds, defendants created and maintained an outmoded and unduly expensive (to Bilewicz and the Plan, that is) retirement plan investment structure that redounded to the financial benefit of FMR …”

While lawsuits based on the concept of self-dealing and collecting excessive fees have been filed against other financial services companies, including Wells Fargo, it is rare for one to survive to its day in court.

This suit, however, might be different.

“This is one of the first I’ve seen that has legs,” Wagner said. “We don’t know if Fidelity did anything wrong, but we can surmise it wouldn’t have gone this far if Fidelity had dotted its i’s and crosses its t’s.”

Porter said he hopes to learn more during discovery.

“We don’t know the inner working of how the funds were selected,” he said. “It seems like whenever Fidelity started a new fund it was automatically added to the plan. It’s very telling that there was no waiting period.”

The crux of the issue isn’t whether Fidelity was legally entitled to use its own funds. There’s no doubt that such investments are allowed.

“It’s really not illegal to use proprietary assets for your own 401(k) plan,” Wagner said. “But you need to be extraordinarily careful if you do.”

“The bottom line is, do you have a prohibited transaction or not?” Wagner said.

The plaintiffs are seeking disgorgement of all investment advisory fees paid to Fidelity’s subsidiaries, a restoration of all plan losses and restitution, according to the suit.

Fidelity oversees corporate retirement plans that contain almost $1 trillion in assets. It also manages hundreds of mutual funds.

See also:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.