In the last month, Fidelity has been hit with two ERISA class action lawsuits over a fee it charges to some third-party mutual funds for access to its retirement plan investment platform (Wong v. FMR, LLC, No. 19-10335 (D. Mass., filed Feb. 21, 2019), and Summers v. FMR, LLC, No. 19-10501 (D. Mass., filed Mar. 18, 2019)). The plaintiffs in both lawsuits are 401(k) plan participants who claim Fidelity has violated ERISA’s fee disclosure, fiduciary duty and prohibited transaction rules. Fidelity has denied any wrongdoing and intends to defend the suits. After media reports on the lawsuits, the Department of Labor (DOL) and Massachusetts’ securities regulatory body are reported to be investigating the fee arrangement.
The controversy stems from what Fidelity calls an “infrastructure fee” the company charges to some third-party mutual funds for inclusion on its FundsNetwork investment platform. The plaintiffs claim the fee is calculated as a percentage of the mutual fund’s total assets under management, offset by the amount of revenue sharing the fund pays to Fidelity. However, according to Fidelity, “[t]he fee is a fixed amount that typically equates to less than 0.05% of a product provider's assets in all retail, workplace, and intermediary channels maintained by Fidelity and does not vary based on a plan's offering of an unaffiliated product supported by Fidelity.”
The fee is “designed to ensure that each Fund Firm meets a minimum required payment to Fidelity” at a time when investors are choosing low-cost, passive investments like index funds, according to an internal Fidelity document obtained by the Wall Street Journal (WSJ) (subscription required). This has led to declining revenue-sharing payments, which the document reportedly describes as “unsustainable economics” while characterizing the fee as a fix for Fidelity’s “broken” business model.
Together, the lawsuits allege the following:
In light of the lawsuit, the Securities Division of the Massachusetts Secretary of the Commonwealth has confirmed to media outlets that it has opened an investigation into the fee arrangement. The WSJ has reported that the DOL is also investigating, but neither Fidelity nor the DOL has confirmed that investigation.