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Recordkeeper Dodges Excessive Fee Claims With Robo-Advisor Arrangement

Fidelity has prevailed in an excessive fee suit that took issue with the fee arrangement of an online advice program and the choices provided participants via a plan’s self-directed brokerage account.

The suit (Fleming v. Fid. Mgmt. Tr. Co., 2017 BL 336561, D. Mass., No. 1:16-cv-10918-ADB, 9/22/17) was brought by three participants of the Delta Family-Care Savings Plan on behalf of that plan’s participants, as well as “all other similarly situated qualified retirement plans,” against Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company, Inc. The Delta Family-Care Savings Plan is part of the $7.5 billion Delta Air Lines Inc. Defined Contribution Plans Master Trust.

According to the original complaint, Fidelity — which provided recordkeeping and other administrative services to the plan — contracted with Financial Engines Advisors L.L.C. to provide investment advice services to individual participants in the plans administered by Fidelity. FE acts as an ERISA fiduciary with respect to the investment advice program and charges a fee for its services as a percentage of the value of a participant’s account.

According to the complaint, “Fidelity was not content, however, with providing participants access to FE’s services. Fidelity wanted a piece of FE’s action, as well,” and “in order to be included as the investment advice service provider on Fidelity’s platform, FE agreed to pay — and is paying — Fidelity a significant percentage of the fees it collects from 401(k) plan investors.”

Motions to Dismiss

In considering the case, Judge Allison D. Burroughs of the U.S. District Court for the District of Massachusetts noted that defendants had made three motions to be considered:

  • defendants’ motion to dismiss for lack of subject matter jurisdiction;

  • defendants’ motion to dismiss for failure to state a claim; and

  • plaintiffs’ motion to strike an exhibit and related factual assertions.

Judge Burroughs noted that “courts have held that plan service providers (such as Defendants) are not acting in a fiduciary capacity when they negotiate with plan sponsors for their own compensation, so long as the final agreement with the plan does not give the service provider the ability to determine or control the actual amount of its compensation.” She concluded that “Fidelity, at the time it collected the fee, had no actual control or discretion over the transaction at issue — the price of the previously bargained-for fees,” and dismissed the claim.

While the plaintiffs acknowledged that participants who use the BrokerageLink self-directed brokerage account exercised some discretionary control, they challenged the specific classes of mutual fund shares that are available for purchase through that service, specifically that the defendants “acquire shares with higher fees, which typically include revenue-sharing payments,” and that the defendants “get a cut of these higher fees in the form of revenue-sharing payments.”

Here the defendants challenged the court’s subject matter jurisdiction in the case, and said that the plaintiffs failed to state a claim. Specifically, that since the BrokerageLink service requires that the participant has to enter/select a specific ticker symbol, which identifies both the mutual fund and the share class to be purchased, “Fleming herself selected both the mutual fund and the share class for her investments,” and thus suffered no injury in fact caused by the conduct alleged in the complaint. As one might expect, the plaintiff argued that that choice was only in a “purely mechanical sense,” since BrokerageLink does not always offer investors “a meaningful choice of share class, such that the investor is free to choose the lowest cost share class for which that investor may be qualified.” Looking at the claims in the light most favorable to the plaintiffs (the party not seeking dismissal), Judge Burroughs chose to deny the motion to dismiss.

As for failure to state a claim, Judge Burroughs concluded that the plaintiffs failed to plausibly allege that defendants were exercising a fiduciary function under 29 U.S.C. § 1002(21)(A) when they decided which securities to make available through BrokerageLink “because Delta retained ultimate authority to include or reject the BrokerageLink product from the list of investment options made available to Plan participants.”

Fiduciary Capacity

As for the notion that defendants acted in a fiduciary capacity by “hiring FE and controlling the negotiation of the terms and conditions under which FE would provide its services to Plan participants” and by “selecting FE as an investment advice provider for Plan participants,” Judge Burroughs noted that while the complaint alleged that defendants “breached their duty of loyalty under ERISA by receiving revenue-sharing payments from FE at the expense of the Plan and Plan participants, and by charging unreasonable and excessive fees for the services they provided to FE,” she noted that “this theory is premised on the notion that Defendants, rather than Delta, ‘hir[ed]’ FE or ‘select[ed]’ FE as an investment advice provider for Plan participants,” but stated that the Master Trust Agreement “compels the conclusion that Delta, not Defendants, exercised final authority or control over the selection or hiring of FE.”

She noted that “if Delta believed, as the Complaint alleges, that the fee-sharing arrangement between Defendants and FE wrongfully inflate[d] the price of investment advice services, Delta was free to decline to hire FE or to terminate its relationship with both Defendants and FE to avoid an unfavorable fee-sharing arrangement.”

While Judge Burroughs denied the motion to dismiss for a lack of subject matter jurisdiction, she allowed the motion to dismiss for failure to state a claim, and denied as moot plaintiff’s motion to strike certain exhibits.