A unit of Fidelity Investments has been targeted in a class-action suit for fiduciary breach under ERISA as a result of its alleged mismanagement of a stable value fund. The fund's low investment returns and high fees made it an imprudent investment for 401(k) plan participants, plaintiffs claim.
The suit, Ellis et al v. Fidelity Management Trust Co., was filed Dec. 11 in the U.S. District Court for the District of Massachusetts.
The lead plaintiffs in the case, James Ellis and William Perry, were invested in the stable value fund in question — the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool — through the Barnes & Noble Inc. 401(k) plan at different times over the period from 2009 to 2015.
“The poor performance and high fees of the MIP were the result of the intentional actions and omissions of the trustee and fiduciary for the MIP, Defendant Fidelity Management Trust Company,” the complaint stated.
The class represented in the suit is all the participants and plans using the fund, as long as the plans are governed by ERISA, said Thomas Clark Jr., an ERISA attorney at the Wagner Law Group who is not involved in the suit against Fidelity. The stable value fund held $6.4 billion as of Nov. 30, versus about $9.4 billion in October 2009.
The MIP is structured as a collective investment trust. Such trusts differ from mutual funds in that the assets they hold are considered “plan assets,” and thus ERISA's fiduciary duties apply, Mr. Clark said.
Prior to 2009, Fidelity engaged in “an imprudent and ultimately unsuccessful investment strategy” by holding a large amount of the portfolio in various forms of securitized debt, such as asset-backed securities, mortgage-backed securities and collateralized debt obligations, which declined in value when the financial crisis hit, the complaint says.
Fidelity significantly modified its asset allocation to reduce risk to the wrap providers for the fund, adopting an overly conservative investment strategy, the complaint says. Wrap providers for a stable value fund — in this case, AIG Financial Products, JP Morgan Chase Bank, Monumental Life Insurance Co., Rabobank Nederland and State Street Bank and Trust — provide principal protection and liquidity to the fund.
The conservative strategy led to lower returns for participants, the complaints says.
Fidelity also upped the fees paid to the wrap providers by 14 basis points, to 22 bps annually, excessive fees which had an “immediate negative financial impact” on participants, according to the complaint.
The suit also claims Fidelity tried to disguise the fund's poor performance by using a money market fund benchmark, as opposed to one more appropriate for stable value funds, in communications with plan sponsors and participants.
“We believe that the claims in this case are without merit and we intend to defend it vigorously,” Fidelity spokesman Steve Austin said. He pointed to the fund's prospectus when asked for further comment.
Attorneys for the plaintiffs — Christopher Micheletti of Zelle Hofmann Voelbel & Mason; Garrett Wotkyns of Schneider Wallace Cottrell Konecky Wotkyns; and Matthew Righetti of Righetti Glugoski — didn't return calls seeking comment.
“This [suit] could be a big deal for others who have similar fact patterns of going conservative after big losses from mortgage-backed securities,” Mr. Clark said. “But all of that assumes what Fidelity did is wrong under ERISA. This is a novel issue and the plaintiffs have an uphill battle to win in court.”
According to the Plan Sponsor Council of America, nearly 60% of 401(k) plans offer a stable value fund.
Fidelity has been involved in other 401(k) suits in recent years. The firm settled a pair of suits for $12 million last year with participants in its own retirement plan. In another suit, Tussey v. ABB, plaintiffs alleged breach of fiduciary duty on the issue of float income; an appellate court found in Fidelity's favor last year, reversing the decision of the lower court.