Fidelity hit with lawsuit over ‘pay to play’ in 401(k)

Posted February 25th, 2019.

As It Appeared On

The firm says it ’emphatically denies’ the allegations that it breached its fiduciary duty.

Nicole Piper

Fidelity has been hit with a class-action lawsuit alleging it breached its fiduciary duty by not disclosing the volume and nature of certain ‘disguised fees’ that it charges asset managers for being on its 401(k) platform.

The class-action suit has been brought in the US District Court in Massachusetts by plaintiff Andre W. Wong on behalf of T-Mobile USA, Inc. 401(K) Retirement Savings Plan and Trust.

The case centers on what Fidelity calls ‘supermarket fees,’ which are paid by asset management companies with funds on the Fidelity 401(k) platform’s no-transaction fee program, to cover the cost of maintaining the platform’s infrastructure.

According to the claim, these fees are charged at Fidelity’s discretion in the event that other revenue sharing fees, such as 12b-1 fees, commissions, or sub-transfer agent fees, fall below a certain level.

The lawsuit argues that Fidelity attempts to categorize these payments as flat dollar fees when in fact they are calculated as a percentage of assets under management. It says that Fidelity does not disclose the amount of money it makes from these fees and forbids the fund companies from doing so either. It goes on to say that the size of these fees are not proportionate to the costs involved of maintaining the platform.

The suit claims that these costs are ultimately passed on to investors in the funds, via increased operating and management charges.

It alleges that the receipt of these fees represents a conflict of interest for Fidelity and a breach of its fiduciary responsibilities.

‘Fidelity has obliquely and deceptively referenced its receipt of the kickback payments as mutual fund “supermarket fees,” but has done so in a false and deceptive manner designed to conceal the true nature of these payments,’ said the lawsuit.

Fidelity has refuted the claims made in the suit.

‘Fidelity emphatically denies the allegations in this complaint. Fidelity fully complies with all disclosure requirements in connection with the fees that it charges,’ said a spokesman for the firm.

Lawyers for the class action suit did not respond to a request for comment.

‘This reveals a common practice in the industry,’ said Charles Field, partner and chairman of financial services practice at Sanford Heisler Sharp. ‘Fidelity is saying, it costs us money to put together the infrastructure and the systems, and we’re getting reimbursed for our expenses in building and filling the shelves.’

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