In a class-action lawsuit suit filed on February 21, 2019, in the U.S. District of Massachusetts, participants in a T-Mobile USA 401(k) plan sued the parent company of Fidelity investments, along with several FMR affiliates, alleging violations of ERISA’s fiduciary standards. Plaintiffs allege that Fidelity, as record keeper for the plan, accepted “secret payments” from certain retirement-plan investment partners, thereby allowing Fidelity to obtain larger profits at the expense of plan participants.
Alleged Facts. Participants state that Fidelity requires certain of its mutual funds and other investment products offered through its “FundsNetwork” platform to make undisclosed “kickback” payments to Fidelity, whenever revenue-sharing payments (for example, 12b-1 marketing and distribution fees) fall below particular levels. Since the kickback payments are not disclosed to plan participants, plaintiffs argue that the effect on retirement plan savings cannot easily be ascertained by participants when choosing from the plan’s menu of investment options.
Accordingly, plaintiffs charge that, because ERISA requires revelation of indirect compensation arrangements as part of its fee disclosure requirements, Fidelity clearly violated the Federal pension law. Plaintiffs further allege that the payments are “deceptively characterized,” and harm plan participants by increasing the costs of mutual funds.
Although Fidelity denies the allegations, it should be noted that Fidelity has been the target of related lawsuits over the past few years. In October, for example, Fidelity was sued for allegedly loading its own 401(k) plan with in-house investment funds, having the effect of “hiding” fees. Similarly, other financial services firms are finding themselves defending their actions in similar 401(k) plan fee-related litigations.
Implications for Fiduciaries. This case is yet another in a series of recent actions brought by plan participants in connection with investment fee disclosure and/or excessive fee charging. Although this case was brought against Fidelity, a third-party provider, ERISA plan fiduciaries are most definitely not “off the hook” – these are often directly sued, or are held liable, because of charges that they negligently chose the third-party providers and/or failed to adequately monitor them, once chosen.
As always, specific questions as to the scope and nature of your ERISA fiduciary duties and potential liability with respect to fee disclosure, excessive fee charging, and similar situations should be directed to your ERISA counsel or other professional advisors.