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Fidelity Fights Back on FundsNetwork Fiduciary Suit


Having been named in at least three separate suits regarding its FundsNetwork platform structure, Fidelity has filed a response.

The suits have been brought by participants in various 401(k) plans served by Fidelity (including the Publicis Benefits Connection 401(k) Retirement Savings Plan, 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, as well as T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust, though this particular motion was filed in response to claims by the Board of Trustees of UFCW Local 23 & Giant Eagle Pension Fund, Janice Andersen, Jason Bailis, Natalie Donaldson, Cynthia Eddy, Myrl Jeffcoat, Thomas Goodrich, Kayla Jones, Karen Pettus, Gina Summers, Andre W. Wong and Heather Woodhouse – an action consolidated from three separate cases in April.  

In essence, the suits claim 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 secret payments (the ‘kickbacks,’ ‘kickback payments,’ or ‘secret payments’) to Fidelity for its own benefit in the guise of ‘infrastructure’ payments or so-called relationship-level fees in violation of, inter alia, the prohibited transaction rules of the Employee Retirement Income Security Act, as well as ERISA’s fiduciary rules.”

Secret ‘Sauce’

The response from Fidelity was no less blunt. “Plaintiffs try to dress up their claims by repeatedly referencing ‘secret payments’ or ‘secret kickback payments,’ they respond in their motion to dismiss (In re Fidelity ERISA Fee Litig., D. Mass., No. 1:19-cv-10335-LTS, motion to dismiss 7/1/19). “But, at the end of the day, the actual facts alleged in the Complaint establish nothing more than that Fidelity negotiated at arm’s length a payment, which it calls an ‘infrastructure fee,’ from certain mutual fund managers to pay for the services required to make their funds available to investors on Fidelity’s ‘FundsNetwork’ investment platform.”

The motion goes on to note that just because the investors who “shop in this mutual fund ‘supermarket’ are 401(k) plans and other ERISA-governed retirement plans,” that “does not change the fact that Fidelity is absolutely entitled to negotiate and collect these fees,” noting “numerous prior ERISA class actions brought against Fidelity in which plaintiffs have sought to hold Fidelity accountable for collecting similar fees,”[1] and that “in all of those cases, and in many similar cases brought against other service providers, courts have dismissed plaintiffs’ claims, holding that there was nothing unlawful about the payments received.”

‘Infra’ Read

Even if the case were to proceed to discovery, Fidelity argues that the process would reveal that:

  • infrastructure fees were not calculated in the manner plaintiffs allege and unilaterally imposed by Fidelity, but that they were heavily negotiated with the fund managers;
  • the infrastructure fees covered services that primarily benefited the mutual fund managers, and not plans or other investors;
  • most of Fidelity’s customers who invest in funds sponsored by companies that pay infrastructure fees are retail or institutional customers, and not Fidelity-recordkept retirement plans like those on whose behalf plaintiffs purport to sue;
  • infrastructure fees were not necessarily paid for out of the mutual funds’ assets, but could be paid for out of the mutual fund managers’ general accounts; and
  • the infrastructure fees were not a “secret,” but rather disclosed to all investors.

However, all of that is essentially moot, Fidelity argues since “even accepting plaintiffs’ false allegations as true, their claims fail as a matter of law. They fail because Fidelity does not act as a fiduciary when it negotiates or receives infrastructure fees from mutual fund managers, and they fail because plaintiffs have not pleaded any basis to recover from a non-fiduciary platform provider like Fidelity.”

Margins ‘Call’

Interestingly enough, the motion raises what it terms “compelling practical reasons” to reject the fiduciary claims, specifically that, “As is clear from the public record, retirement plan service providers operate at increasingly thin margins, and to continue in business they must negotiate arrangements that allow them some amount of profit,” and “if a fiduciary duty applied to compensation negotiations that profit motive would presumably violate ERISA, which prohibits plan fiduciaries from acting other than in the exclusive interest of plan participants.” 

The motion goes on to claim that “…if service providers were deemed fiduciaries to 401(k) plans when negotiating their compensation, they would be required to negotiate with the ‘best interests’ of the plans in mind, meaning that they could not charge the plans anything more than cost, and that they would have to agree to credit to the plans any excess compensation received from third parties. And, if that were the case, there would be no providers left in business.”


1. As an example, see Recordkeeper Dodges Excessive Fee Claims With Robo-Advisor Arrangement