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Fidelity Served With 2nd FundsNetwork Suit

Litigation

For the second time in less than a month, Fidelity is being accused of charging excessive, undisclosed fees via its FundsNetwork platform.

The most recent was filed by plaintiffs Gina Summers, Cynthia Eddy and Kayla Jones on behalf of the plans in which they participate (the Rock Holdings & Associated Companies 401(k) Savings Plan, the Cadence Health Matched Savings Plan, and the Blue Shield of California Tax Deferred Salary Investment Plan), which are recordkept by Fidelity. 

This latest suit (Summers v. FMR LLC, D. Mass., No. 1:19-cv-10501, complaint filed 3/18/19) claims that, “since at least 2016, Fidelity has breached its fiduciary duties to the Savings Plans by charging mutual fund and other investment companies a substantial fee as a condition for their investment vehicles being offered on Fidelity’s fund platform.” They go on to allege that, while Fidelity refers to this arrangement as an “infrastructure” fee, “it is in fact an illegal and undisclosed pay-to-play fee that Fidelity extracts from investment companies that wish to ensure their products are marketed and sold through Fidelity.” This arrangement “drives up expense ratios borne by 401(k) plan participants, causing these participants to pay more in fees and receive lower returns on their investments.”

‘Infra’ Read

The report cites a February Wall Street Journal report citing internal Fidelity documents that infer that the 0.15% fee calculated by reference to industry-wide assets of the fund families, rather than assets held only through Fidelity, “confirms that the Fee bears no meaningful relationship to any ‘infrastructure’ maintenance by Fidelity, and hence constitutes excessive compensation.” Moreover, the plaintiffs claim that this fee results in “increased expense ratios for participants that directed their retirement savings into associated funds.” The suit goes on to cite investigations into the practice by both the U.S. Department of Labor and the Massachusetts Securities Division.

The suit goes on to outline the program structure, noting that a mutual fund can obtain investment money from Fidelity participants only if Fidelity has selected the fund for inclusion on its FundsNetwork platform, and that Fidelity “has unlimited discretion to add, substitute, and remove mutual funds on this platform, including to eliminate funds based on considerations like contract pricing.”

Warning Signs?

The suit notes that Fidelity “warned mutual funds in written materials that any fund refusing to pay the Fee would ‘be subject to a very limited relationship’ with Fidelity,” which they say amounts to telling the participating funds that they must pay the fee or be removed from the FundsNetwork, “resulting in a loss of income.” The plaintiffs call the fee a “kickback” because, they say, “…mutual funds paid it under threat of removal from Fidelity’s platform and its payment served to share a portion of the funds’ profits with Fidelity.”

They also claim that while “ERISA requires disclosure of such a marketing and distribution fee to the sponsors of the Savings Plans, Fidelity did not do so,” saying that instead “in written materials provided to participating mutual funds, it warned the funds not to disclose the Fee while falsely characterizing it to plan sponsors as covering ‘infrastructure’ costs.”

In response to separate litigation on this point, Fidelity has responded that, in fact, its fees were disclosed as required. The plaintiffs challenge this claim, noting that while it was disclosed as “covering the costs of maintaining the infrastructure that is needed to make non-Fidelity mutual funds available,” but allege that these fee payments “bear no relation to any administrative services, for ‘infrastructure’ or otherwise, that Fidelity perform.”

In response to the claims, Fidelity spokesman Michael Aalto told NAPA-Net: “Fidelity fully complies with all disclosure requirements in connection with the fees that it charges and any assertion to the contrary is not only misleading, but simply false. Fidelity has an outstanding platform that provides significant benefit to our customers, including an extensive offering of funds with no transaction fees, the ability to consolidate investments in one place, and industry-leading tools to help find the right funds. We are committed to remaining an open architecture platform that provides access to thousands of funds to all of our customers, but such a broad offering requires substantial infrastructure. For example, Fidelity must support systems and processes needed for recordkeeping, trading and settlement, make available regulatory and other communications, and provide customer support online and through phone representatives. It is costly to maintain this kind of infrastructure, and Fidelity requires the fund firms on our platform to compensate us for those costs. For a small number of those companies, this includes an infrastructure fee that is charged to the fund firms. The fee is not charged to the plan sponsor or plan participants.”

This is, of course, the second ERISA class action to challenge Fidelity’s FundsNetwork structure. A T-Mobile USA Inc. participant filed a similar suit in February.

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All comments
James Krisnitski
5 years 1 week ago
In response to separate litigation on this point, Fidelity has responded that, in fact, its fees were disclosed as required. The plaintiffs challenge this claim, noting that while it was disclosed as “covering the costs of maintaining the infrastructure that is needed to make non-Fidelity mutual funds available,” but allege that these fee payments “bear no relation to any administrative services, for ‘infrastructure’ or otherwise, that Fidelity perform.”
Betsy Krisnitski
5 years 1 week ago
In response to separate litigation on this point, Fidelity has responded that, in fact, its fees were disclosed as required. The plaintiffs challenge this claim, noting that while it was disclosed as “covering the costs of maintaining the infrastructure that is needed to make non-Fidelity mutual funds available,” but allege that these fee payments “bear no relation to any administrative services, for ‘infrastructure’ or otherwise, that Fidelity perform.”
James Krisnitski
5 years 1 week ago
In response to separate litigation on this point, Fidelity has responded that, in fact, its fees were disclosed as required. The plaintiffs challenge this claim, noting that while it was disclosed as “covering the costs of maintaining the infrastructure that is needed to make non-Fidelity mutual funds available,” but allege that these fee payments “bear no relation to any administrative services, for ‘infrastructure’ or otherwise, that Fidelity perform.”