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Fidelity Settles for $28.5 Million, Process Changes


The nation’s largest recordkeeper has come to terms with participants in its own 401(k) regarding allegations of excessive recordkeeping fees, along with some changes in practices.

The Case

The original suit was filed in October 2018 by plaintiffs Kevin Moitoso, Tim Lewis and 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.” 

The Settlement

Under the terms of the proposed Settlement, Fidelity will cause its insurers to pay a gross settlement amount of $28,500,000 into a common fund for the benefit of the Class. The agreement—which must still be approved by the court—claims to provide “the Class that falls well within the range of court-approved settlements in similar ERISA cases, and provides the Class with essentially a full recovery[i] of the alleged damages for failure to monitor recordkeeping fees (which partially overlapped with alleged damages associated with the failure to monitor certain Fidelity funds).”

The settlement also provides that “one or more Plan fiduciaries will (1) undertake to monitor Plan recordkeeping fees; and (2) undertake to monitor the Plan’s investment options, other than any investments available through the Plan’s self-directed brokerage account.” This, the settlement says “…directly address the Court’s finding in its Case Stated Order that Fidelity ‘fail[ed] to monitor proprietary funds other than the two DIAs, and … fail[ed] to monitor recordkeeping expenses.’”

The Settlement Agreement requires that Class Counsel file their Motion for Attorneys’ Fees and Costs at least 14 days before the deadline for objections to the proposed Settlement, and also provides for Service Awards up to $10,000 per Named Plaintiff, subject to Court approval.

Fidelity Comment

A Fidelity spokesperson commented in an email “As the leading provider of retirement savings in the country, we are especially proud of the Fidelity Retirement Savings Plan and the additional contributions the company makes to help our employees achieve their retirement goals. We feel we offer a generous 401(k) plan that provides high value and offers superior levels of customer service.”

Fidelity believes that this lawsuit lacked merit and that its management of the Plan complies fully with the Employee Retirement Income Security Act (ERISA). 

Nonetheless, litigation imposes substantial costs and can be a distraction for Fidelity executives and employees. In order to avoid spending further resources on the lawsuit, and because Fidelity anticipates that approximately 80% of this settlement payment (after payment of attorneys’ fees) will go into the Fidelity Plan, Fidelity determined that it makes sense to settle the lawsuit at this time. Terms include a $28.5 million payment, approximately 80% of which will be paid into the Fidelity Plan, after payment of the plaintiffs’ attorneys’ fees.”

Now we’ll see what the judge thinks…

[i]The Settlement Agreement explains that the monetary relief ($28.5 million) represents approximately 1.11% of Class Members’ assets in the Plan’s “Open Architecture Window” exclusive of PAS-W ($2.567 billion), which were the assets upon which Plaintiffs’ remaining claims were focused as of the point when the Settlement was negotiated. It also details that this amount constitutes approximately 84% of the alleged losses due to failure to monitor recordkeeping expenses ($33.9 million), and a full recovery based on the raw amount of the damages for that claim ($27.97 million) before any present value adjustment.