Having been named in at least three separate suits regarding its FundsNetwork platform structure, Fidelity has prevailed in at least one.
This particular suit, brought as a potential class action by Andre W. Wong, a participant in the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust, on behalf of that plan, “and all other similarly situated plans” claims that beginning in or about 2017, Fidelity began requiring various mutual funds, affiliates of mutual funds, mutual fund advisors, sub-advisors, investment funds, including collective trusts, and other investment advisors, instruments or vehicles that are offered to the plans through Fidelity’s FundsNetwork to make what the suit calls “secret payments to Fidelity for its own benefit in the guise of ‘infrastructure’ payments or so-called relationship-level fees” in violation of ERISA’s prohibited transaction rules.
This, plaintiff Wong alleged, was part of a “pay-to-play scheme in which Fidelity receives these payments from mutual funds in the event that otherwise disclosed 12b-1 fees, administration fees, service fees, sub-transfer agent fees and/or similar fees (‘revenue sharing payments’ or ‘RSPs’) fall below a certain level and Fidelity requires payment of these kickbacks in return for providing the mutual funds with access to its retirement plan customers, including its 401(k) plan customers.”
Setting the Network Funds & Fees
Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts noted (In re Fidelity ERISA Fee Litig., 2020 BL 54722, D. Mass., No. 1:19-cv-10335, 2/14/20) that the “essence of Plaintiffs’ first theory of liability” was that by requiring the payment of infrastructure fees from mutual funds that participate in FundsNetwork after the Plans have entered into their Contracts with the Fidelity defendants, the latter had unilaterally increased the amount of their compensation from the plans (since because the mutual funds necessarily pass on whatever infrastructure fees they pay).
In essence, the plaintiffs contend that, “Fidelity is a fiduciary under ERISA by virtue of its discretion and exercise of discretion in negotiating/establishing its own compensation by and through its setting of the amount and receipt of the secret [infrastructure fee] payments.”
That said, Judge Sorokin dismissed that notion, ruling that it “fails because they concede that Defendants negotiate the payment of infrastructure fees with the mutual funds.” He noted that their argument also came up short “because the Complaint does not plausibly allege that the mutual fund managers who pay the infrastructure fees to Fidelity are required to pass on the costs of the fees to the Plans or to the participants who invest in their mutual funds. Rather, the decision of whether to pass on those costs is made independently by the mutual fund managers, not by Fidelity.”
He went on to note that, “Without such control, Defendants are not fiduciaries with respect to the compensation they receive from the Plans,” and then if “service providers are not ERISA fiduciaries when negotiating their compensation with ERISA plans, it is difficult to see how a service provider could be an ERISA fiduciary when it negotiates a fixed rate of compensation from an entity other than the Plan.”
Use of Omnibus Accounts
As for the argument that Fidelity was a fiduciary with respect to their use of the Omnibus Accounts, Judge Sorokin also found that argument deficient because the plaintiffs here “do not allege that, as directed trustees of the Omnibus Accounts, Defendants fail to follow the instructions they receive from Plan Sponsors and participants as to which mutual funds are selected for investment, or how the investments should be allocated. Nor do they allege that Defendants improperly redirect the investments of Plan participants, like Plaintiffs, through the Omnibus Accounts from mutual funds managed by companies that do not pay infrastructure fees to mutual funds managed by companies that do.”
Building the Menu
The plaintiffs had a third theory; that the defendants are plan fiduciaries because they control the menu of investment options available to the plans, but they failed to persuade Judge Sorokin. “The Contracts make clear that it is the Plan Sponsors—not Defendants—who select which investment options are made available to the Plans’ participants from the FundsNetwork,” and that the parties “acknowledge that the Administrator is capable of evaluating investment risks independently.”
Judge Sorokin concluded that, “As several other courts have held, having control over the broad menu of investment options from which plan sponsors may choose their plan's investment options does not transform a platform provider into a functional fiduciary, “ and that therefore, “selecting the funds available on the FundsNetwork Platform does not, without more, transform Fidelity into a fiduciary.”
Judge Sorokin cites as “important” the sole allegation that Fidelity “maintains complete discretion to substitute, eliminate and add mutual funds offered through its FundsNetwork” and that “Fidelity has exercised” that discretion. This “broad discretion” to amend the Contracts to comply with changes in the law or to update services and procedures—a discretion they can only exercise after providing prior written notice—does not constitute an allegation that Defendants have (or have exercised) any discretion to alter the specific investment options available to the Plans in which Plaintiffs participated. Nor does that language on its own, without any specific factual allegations, plausibly suggest Defendants’ authority to alter investment options.” And thus the court rejected this theory of fiduciary status as well.
Party in Interest
As for the final count, the plaintiffs had alleged in the alternative that even if the Fidelity defendants here were found not to be a fiduciary or co-fiduciary under ERISA, they would nonetheless be “liable as a party-in-interest or other non-fiduciary that knowingly participated in prohibited transactions and breaches of fiduciary duty of any of the Defendants who are deemed to be fiduciaries.” However, Judge Sorokin was no more persuaded here, noting that this would require that at least one of the defendants be found to be a fiduciary, and “because the Court has held that Plaintiffs have not plausibly alleged Defendants’ fiduciary status as to any of the types of conduct as to which they complain, Count V fails for the same reason Counts I-IV fail.”
What This Means
Not quite a year ago, Fidelity found itself the target of several of these suits, alleging that its control of the fees, construction and maintenance of, its FundsNetwork platform not only made it a fiduciary to the plans participating in that network, but that it breached those fiduciary obligations by charging excessive, and undisclosed fees.
Simply stated, the plaintiffs here contended that (according to the court), “Fidelity is a fiduciary with respect to its compensation both because it has the contractual authority to determine its own compensation and because it acted outside of its contractual authority when doing so.”
This particular judge took the position that Fidelity’s fee negotiations were with the participating funds, not the plans, even though those fees were passed along to the plans, and that the ultimate choice of the funds by the plan was a choice made by the plan(s), not one foisted on them. Ultimately, as we saw in another recent case, this meant that Fidelity lacked the requisite control of plan assets sufficient to convey fiduciary status.
