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September 18, 2013 at 12:11 PM
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.
