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'Unduly Conservative’ Investment Strategy Draws Excessive Fee Suit

A new lawsuit claims that that an “unduly conservative” investment strategy combined with allegedly excessive fees resulted in an ERISA fiduciary violation.

The complaint accuses Fidelity Management Trust Co. of responding to losses incurred during the 2008 financial crisis by adopting an overly conservative investment strategy in the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP), and that that strategy was designed to appease the company’s “wrap providers” (including State Street, AIG, and JP Morgan Chase) at the expense of 401(k) investors in one of Fidelity's stable value funds. The suit claims that the strategy was “…contrary to the purposes of stable value fund investing,” and that not only did Fidelity agree to allow the wrap providers to charge excessive fees, but that it also charged “excessive fees” for its own account.

“Effectively, Fidelity paid for the problems that its mismanagement created with the Wrap Providers by bailing out the Wrap Providers with plan participants’ money,” the complaint contends.

The suit further claims that Fidelity’s subsequent benchmarking of this offering against money market funds, rather than stable value funds, was designed to make the fund look more competitive than it actually was.

“Fidelity thus breached the fiduciary duties imposed by ERISA and caused Plaintiffs and the members of the proposed Class they seek to represent injury in the form of diminution of investment returns they would have realized had the MIP been managed and supervised in accordance with the fiduciary duties required by ERISA,” according to the complaint.

The lawsuit, which states violations of ERISA on behalf of “several thousands” of individual 401(k) investors, was filed Dec. 11 in the U.S. District Court for the District of Massachusetts by Zelle Hofmann Voelbel & Mason LLP and Schneider Wallace Cottrell Konecky Wotkyns LLP.

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