A 401(k) plan participant claims a fund supermarket fee structure amounts to hidden fees designed to shore up revenues lost due to the increased use of passive and non-revenue sharing funds.
The 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 alleges (Wong v. FMR LLC, D. Mass., No. 1:19-cv-10335, complaint 2/21/19), is 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.”
The suit, filed in the U.S. District Court for the District of Massachusetts, further alleges that these fees 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 revenue sharing.
The suit claims that Fidelity “attempts to categorize these secret kickback payments as flat dollar payments”, but that they are instead “calculated based upon the assets the mutual funds maintain under management…” and “are offset by the amount, if any, of revenue sharing payments generated by the assets for which Fidelity provides recordkeeping and related services, including with respect to such services that are provided by Fidelity to the Plans,” and that not only does the firm not disclose these amounts (which the suit claims “amount to at least tens of millions of dollars per annum and likely in the hundreds of millions of dollars per annum”), but that it “forbids the mutual funds from disclosing the amount of these secret payments, despite their legal obligation to do so.” The suit also claims that these “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 claims that these are “services that Fidelity has historically provided to its retirement plan customers as a necessary part of its business in return for fees directly collected by it from such customers, and these fees generally do not change as a result of Fidelity’s receipt of the kickbacks from the mutual funds and are not reduced in a manner that corresponds with the amount of the secret kickback payments received.
The suit acknowledges that, “in certain materials available to customers, Fidelity has obliquely and deceptively referenced its receipt of the kickback payments as mutual fund ‘supermarket fees,’ but goes on to claim that the firm has done so “in a false and deceptive manner designed to conceal the true nature of these payments” … ”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.”
The suit concludes that, even if it were to be determined that Fidelity had disclosed this fee arrangement, “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.”
"Fidelity emphatically denies the allegations in this complaint," a company spokesperson told NAPA-Net, adding, "Fidelity fully complies with all disclosure requirements in connection with the fees that it charges."