Claiming that “Fidelity literally has lined its pockets with at least hundreds of millions of dollars in secret payments by and through self-dealing, other prohibited transactions and breaches of its fiduciary duties,” a third suit has been filed by a participant in a plan served by the FundsNetwork platform.
This time (Jason Bailis v. FMR LLC et al., case number 1:19-cv-10654, in U.S. District Court for the District of Massachusetts) the plaintiff is Jason Bailis, a participant in the Publicis Benefits Connection 401(k) Retirement Savings Plan, who 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 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.”
The suit claims – as have the two that preceded it – that these so-called “kickback” payments amount to 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” fall below a certain level – and that Fidelity requires these payments in order to be included on the FundsNetwork platform. Moreover, that Fidelity uses its ownership and control of the FundsNetwork to negotiate for the receipt of these kickbacks from mutual funds, and “the secret payments have the effect of increasing the expense ratios and/or other expenses of the mutual funds, which expenses are deducted directly from the assets of the Plans and their participants.”
The suit also notes that the amounts of “these kickbacks bear absolutely no relationship to the cost or value of any such services and, instead, plainly are a replacement for declining amounts of revenue sharing payments received by Fidelity as a result of the increasing use of passive mutual funds, institutional and R6 share classes of mutual funds and collective trusts, which pay little or nothing in the way of RSPs (revenue-sharing payments).
‘Restrict’ Shuns?
The suit claims that “Fidelity makes it clear to mutual funds that, if they refuse to make the secret payments, they will be restricted in their relationship with Fidelity and Fidelity, inter alia, will not permit a mutual fund to add new funds to the FundsNetwork, will eliminate its existing mutual funds from the FundsNetwork through a hold and redeem approach, will impose additional fees on Fidelity’s clients that invest in the mutual funds, and will eliminate opportunities for these mutual funds to grow their business through Fidelity’s FundsNetwork and by providing access to the Plans.” Moreover, the suit says that “although Fidelity describes itself as providing an open architecture platform for the Plans, Fidelity also effectively controls the menu of available mutual funds offered in its FundsNetwork and retains the discretion to change its fund menus and to not offer certain investment options to Plans based upon contract pricing and other considerations.” The suit also claims that “Fidelity hides the existence of the kickback payments at issue from the Plans, in breach of its fiduciary duties, and explicitly prohibits the mutual funds from disclosing the amount of the kickback payments.”
And while the suit acknowledges that Fidelity refers to “supermarket fees,” but claims that it “has done so in a false and deceptive manner designed to conceal the true nature of these payments,” and that “by falsely and deceptively claiming that the payments relate to the provision of services by Fidelity on behalf of the mutual funds, even though the payments at issue bear no relationship to any services that Fidelity purportedly provides on behalf of the mutual funds.”
“As a matter of common sense and simple economics,” the suit continues, “the Plans ultimately pay for the kickback payments that Fidelity has exacted from the mutual funds, and Fidelity has no defensible basis for concealing the existence of this indirect compensation from the Plans. The kickback payments are directly related to the assets of the Plans since (a) they are calculated, in part, based upon those very assets, and (b) revenue sharing payments associated with the Plans’ assets directly reduce the amount of the kickback payments paid by the mutual funds.”
Infra ‘Structures’?
The suit claims that these fees amount to “at least tens of millions of dollars per annum and likely in the hundreds of millions of dollars per annum, to the Plans and forbids the mutual funds from disclosing the amount of these secret payments, despite their legal obligation to do so.” The suit cites a confidential document that Fidelity provides to mutual fund companies, where he alleges that “Fidelity prohibits them from disclosing, either orally or in writing, to plan sponsors, plan beneficiaries and the public information concerning Fidelity’s ‘infrastructure’ fees, including the manner in which they are determined. In that document, Fidelity stressed that the dollar amount charged for the infrastructure fee is confidential, and that the fee is a flat dollar amount tied to the mutual fund company’s industry-wide assets, and not assets held only through Fidelity.”
Finally, the plaintiff notes that, even if one were to assume that Fidelity had adequately disclosed the existence and nature of these kickback payments, “Fidelity’s receipt of the kickback payments for its own account is per se unlawful and cannot be excused by alleging that there was any purported disclosure or consent. Similarly, Fidelity’s receipt of compensation for its own account, by leveraging the assets contained in the Omnibus Accounts, amounts to self-dealing, and the self-payment to Fidelity of unreasonable compensation through the investment and use of the Plans’ retirement assets violates applicable law (specifically, ERISA).”
The plaintiff in this case is represented by David Pastor of Pastor Law Office, and Daniel E. Bacine and Mark R. Rosen of Barrack Rodos & Bacine.
