Skip to main content

You are here

Advertisement

SDBA Options, Advice Offering Draw Excessive Fee Suit

A new excessive fee lawsuit challenges the fee arrangement of an online advice program, and the choices provided participants via a plan’s self-directed brokerage account.

The suit was brought by three participants of the Delta Family-Care Savings Plan on behalf of that plan’s participants, as well as “all other similarly situated qualified retirement plans” against Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company, Inc. The Delta Family-Care Savings Plan is part of the $7.5 billion Delta Air Lines Inc. Defined Contribution Plans Master Trust.

According to the complaint, Fidelity — which provided recordkeeping and other administrative services to the plan — contracted with Financial Engines Advisors L.L.C. to provide investment advice services to individual participants in the plans administered by Fidelity. FE acts as an ERISA fiduciary with respect to the investment advice program and charges a fee for its services as a percentage of the value of a participant’s account.

According to the complaint, “Fidelity was not content, however, with providing participants access to FE’s services. Fidelity wanted a piece of FE’s action, as well,” and “in order to be included as the investment advice service provider on Fidelity’s platform, FE agreed to pay — and is paying — Fidelity a significant percentage of the fees it collects from 401(k) plan investors.”

The complaint alleges that those fees “are not being paid for any substantial services being provided by Fidelity to FE or to participants of the Plans, but are instead being paid as part of a so-called ‘pay-to-play’ arrangement.” Moreover, plaintiffs claim that this arrangement “wrongfully inflates the price of investment advice services that are critical to the successful management of workers’ retirement savings.”

That’s not all that drew fire here, however. The plaintiffs claim that Fidelity’s self-directed brokerage account option (BrokerageLink) offered access to “share classes that have higher expense ratios and that will pay Fidelity significant amounts in revenue sharing payments, effectively using the Plans’ assets for its own benefit and for its own account” — and then, according to the lawsuit, “took affirmative steps” to conceal those practices and the revenue generated for Fidelity. They also took issue with the imposition of an asset-based fee for a “fixed level of service.”

The complaint notes that the weighted average of revenue sharing payments reported on the Annual Return for the Delta Plan in 2012 is 31.4335 basis points, and the plaintiffs allege that, if that rate of revenue sharing applied to the $830 million invested in mutual funds through BrokerageLink, “the Delta Plan alone would be paying $2.6 million annually to provide participants with nothing more than access to those mutual funds.”

Between the three current plaintiffs, two engaged FE to provide advice, and the third invested via the BrokerageLink option. The Delta plan, as of 2014, had approximately $7.567 billion in assets, of which about $2.8 billion were invested through the BrokerageLink program.

The case is Fleming v. Fidelity Management Trust Co., D. Mass., No. 1:16-cv-10918, complaint filed May 20, 2016.

Advertisement