Fidelity has won a dismissal of a class action brought by 401(k) plan participants over “infrastructure fees” charged to third-party mutual funds on the company’s investment platform (In re Fidelity ERISA Fee Litig., No. 19-10335 (Feb. 14, 2020)). The plaintiffs alleged the company’s imposition of the fees violates ERISA’s fiduciary-duty rules. But the court dismissed all claims after finding Fidelity didn’t act in a fiduciary capacity when setting the fees. The plaintiffs have appealed the court’s decision in this case, which consolidates three lawsuits making similar claims against Fidelity.
Fidelity describes the infrastructure fee as compensation for the cost of maintaining its “FundsNetwork” investment platform. Fidelity negotiates with mutual fund managers to set the fee, which is a fixed amount based on the mutual fund’s assets under management, offset by other revenue Fidelity receives from the fund.
The plaintiffs claimed the fee bears no relation to Fidelity’s cost for maintaining its platform, but instead is a “pay-to-play” charge for access to the company’s retirement plan investors, who ultimately pay the cost through higher investment fees. The plaintiffs alleged the infrastructure fee’s true purpose is to make up for lost revenue-sharing income at a time when investors prefer low-cost, passive investments like index funds. For purposes of the motion to dismiss, Fidelity conceded the fee is designed to make up for lost revenue-sharing. However, the company maintained that the fee is a properly negotiated, arms-length payment for Fidelity’s services.
The plaintiffs claimed Fidelity breached its fiduciary duties by imposing the infrastructure fees. But this claim can only be valid if Fidelity acts in a fiduciary capacity. Under ERISA, individuals act in a fiduciary capacity to the extent they exercise any discretionary authority or control over the management of a plan or its assets. The plaintiffs proposed three theories to support their claim that Fidelity was a fiduciary — and the court rejected all three:
The plaintiffs also alleged Fidelity mischaracterized the infrastructure fees to avoid having to disclose them to retirement plan customers as indirect compensation — i.e., compensation received from sources other than the plan or sponsor — under ERISA’s fee disclosure rules. The plaintiffs claimed the alleged failure to disclose the fees caused the plan to enter into a service contract that was intrinsically unreasonable — resulting in a prohibited transaction and fiduciary breach. The court dismissed this claim, stating it required at least one defendant to be a fiduciary — something the plaintiffs failed to plausibly allege. In dismissing the claim on these grounds, the court never addressed whether Fidelity violated ERISA’s disclosure rules.