Fidelity quietly settles employee lawsuits

At issue was accusations the fund giant engaged in self-dealing in 401(k) plan

Aug 12, 2014 @ 2:26 pm

By Darla Mercado

While everyone was celebrating the Fourth of July weekend, 401(k) giant Fidelity Investments quietly settled a pair of retirement plan lawsuits filed against it by its own employees.

In a July 3 filing with the U.S. District Court for the District of Massachusetts, Fidelity's parent company, FMR, agreed to pay out $12 million and to implement a slate of changes to its retirement plan. The firm will present its workers with a selection of Fidelity and non-Fidelity mutual funds, raise auto-enrollment to 7% from 3%, and provide that revenue sharing attributable to non-Fidelity mutual funds will be credited to participants in the same manner as revenue from Fidelity mutual funds and collective trusts.

As part of the settlement, the company will also continue offering the Fidelity Freedom Funds-Class K as a qualified default investment alternative, as well as its Portfolio Advisory Services at Work program. The latter will be provided at no cost to participants.

Thomas E. Clark Jr., an attorney with The Lowenbaum Partnership and editor-in-chief of the Fiduciary Matters Blog, first wrote about the settlement in a blog post Tuesday.

“Fidelity believes both lawsuits are entirely without merit,” said company spokesman Vin Loporchio. “However, litigation imposes substantial costs and burdens, and we determined that settling these cases is in the best interest of our business and our employees.”

“A significant majority of the settlement will be allocated to the employees, so we believe it's better for them to receive the financial benefit than to expend a substantial amount on litigation,” he added.

Of the 29 plaintiffs, only two are current employees.

The settlement addresses concerns raised by Fidelity's own participants in a pair of recent lawsuits, Bilewicz, et al. v. FMR, filed in 2013, and Yeaw et al. v. FMR, filed in January. At the heart of the complaints was, the plaintiffs' claim that Fidelity participated in self-dealing within the FMR LLC Profit Sharing Plan at the expense of its own participants.

Within its plan, Fidelity provided trustee, record-keeping and administrative services. The participants said that FMR is a fiduciary to the retirement plan, as it has discretionary authority over the plan's management, disposition of the assets and the administration of the plan. The plaintiffs also alleged that FMR's committee members were responsible for choosing, monitoring and maintaining the investment options within the plan.

In an interview with InvestmentNews last year, Gregory Y. Porter, an attorney with Bailey & Glasser LLP and the attorney representing the plaintiffs in the Bilewicz case, said, “The conflicts of interest are pretty obvious to the casual observer: [Fidelity] chooses the funds, and all 170 funds are Fidelity funds.”

“I don't see how you can have a best-of-breed process where your evaluation can result in 100% Fidelity funds,” he said.

Fidelity, meanwhile, asserted that “FMR provided an extensive platform of high-quality mutual funds with an appropriate investment mix for its current and former employees.” The firm also argued that the Labor Department permits financial service providers who work with 401(k) plans to offer in-house products to their own workers.

Judge Denise J. Casper granted preliminary approval of the settlement on July 10. She also scheduled a fairness hearing for Oct. 14.

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