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Fidelity Ready to Settle Excessive Fee Suit

Litigation

The nation’s largest recordkeeper is near to a deal with participants in its own 401(k) regarding allegations of excessive recordkeeping fees.

The original suit was filed in October 2018 by plaintiffs Kevin Moitoso, Tim Lewis, Mary Lee Torline (and now joined by Sheryl Arndt) on behalf of participants in the Fidelity Retirement Savings Plan, which, according to the suit, at the end of 2016, had nearly $15 billion in assets and covered 58,000 participants. The plaintiffs alleged a number of breaches common to the recent wave of proprietary fund/fiduciary breach litigation: that the Fiduciary Defendants “have not managed the Plan with the care, skill, or diligence one would expect of a plan this size,” but rather that they “…used the Plan as an opportunity to promote Fidelity’s mutual fund business at the expense of the Plan and its participants.”

In late March, Judge William G. Young of the U.S. District Court for the District of Massachusetts ruled that, in fact, “Fidelity has breached its duty of prudence with regard to its failure to monitor the recordkeeping expenses, and the class members may recover under the equitable doctrine of surcharge,” explaining that, “as with the failure to monitor the proprietary mutual funds, the Plaintiffs at trial will bear the burden of proving the exact extent of loss (an exercise that may or may not be trivial given the parties’ stipulations), while Fidelity will bear the burden of showing this lack of monitoring has not caused this loss.” 

That said, this was a complicated case, involving not only plaintiffs (and interests) that overlapped with a 2014 settlement agreement, but also arguments from Fidelity that, as Judge Young wrote, “…does not dispute that the Plan Fiduciaries declined to monitor recordkeeping expenses but argues that it has not violated its fiduciary duties because all expenses were returned to the Plan through the mandatory Revenue Credit, and thus netted to zero.” In essence, he notes that “…argument rests on the proposition that there is no breach of a duty to be cost-conscious where there are no costs.”

What we have at the moment is merely a notice of settlement in principle, not the actual terms. That notice says that “the Parties expect to be able to finalize a comprehensive settlement agreement and file a motion for preliminary approval on or before July 2, 2020,” and that—as a result, the parties ask that “all pending proceedings and deadlines be stayed, and that the upcoming trial (scheduled to begin on July 6, 2020) be taken off the Court’s calendar.”

What This Means

This case presented a number of interesting issues—and, indicative of these times, the July 6 trial was slated to be conducted via Zoom. 

Unlike many of these settlements, there has at least been a partial adjudication of the facts and issues in this case, not the least of which was that failing to consider alternatives to its mutual funds did not constitute a breach of prudence. 

The conclusion in this case that there is a duty to monitor recordkeeping fees, if not particularly surprising, had the interesting twist to consider if an arrangement that netted those fees to zero might at least mitigate an assessment of damages.

One thing that is clear, however—a failure to monitor recordkeeping charges, whatever the cost—is clearly not “free.”

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