Fidelity 401(k) lawsuit could up ante for plan advisers

Advisers need to scrutinize any sort of markup on a platform they're recommending, making sure it is reasonable

Jun 6, 2016 @ 2:09 pm

By Greg Iacurci

A lawsuit filed recently against Fidelity Investments, the largest record keeper of defined contribution plans in the U.S., highlights the growing scrutiny on 401(k) plan costs and increased need for retirement plan advisers to evaluate all tranches of fees paid to plan providers.

The suit, Fleming v. Fidelity Management Trust Co., alleges that the record keeper engaged in a “pay to play” scheme with Financial Engines Advisors, a provider of participant-level robo investment advice services in the Delta Family-Care Savings Plan. It also alleges that Fidelity at times acquired higher-cost funds through the plan's brokerage window.

Under the co-called pay-to-play arrangement, Financial Engines gave approximately half of the 45-basis-point fee investors paid for advice to Fidelity in the form of a “kick-back” for inclusion on its record-keeping platform, according to the complaint.

Plaintiffs allege that's “plainly unreasonable” on a relative cost basis, given participants received little value for this addition to the advice fee, and violates Fidelity's fiduciary responsibility and the prohibited transaction rules under the Employee Retirement Income Security Act of 1974.

“I think 401(k) advisers now really have to understand much more than they did before,” said Marcia Wagner, principal at The Wagner Law Group. “They have to understand the inner working of their vendors and how the hot dog is created. If there's something not kosher in the hot dog, you have to make sure the pork comes out.”

“This is the first time I've seen the pay-to-play be an issue” with providers of computerized investment advice on 401(k) platforms, Ms. Wagner said, adding that it could be a big deal for advisers because these types of compensation arrangements are fairly common. “That's how a lot of the industry works," she said. "And if that's going to be prohibited, then it's an issue.”

Of course, it remains to be seen whether a court will find plaintiffs' arguments to be sound.

“Anybody can sue anybody. Until a judge rules or a jury rules it doesn't mean anything, really,” said Fred Barstein, founder and chief executive of The Retirement Advisor University. “I didn't see any real systemic issue or big issue here, unless [the fee] was unreasonable or they weren't disclosing it.”

“It's really the responsibility of the plan sponsor to ensure fees are reasonable for the services being rendered,” Mr. Barstein added.

Basically, the takeaway for advisers boils down to advisers needing to scrutinize any sort of markup on a platform they're recommending, knowing what the markup is and if it's reasonable, Ms. Wagner said.

“The bar has been raised now,” she said. “The entire industry is moving, because of litigation and regulation, to full transparency.”

The Fidelity lawsuit, filed May 20 in a Massachusetts district court, is just one suit in a flurry of 401(k) litigation that has come to light in the past several months. One recent suit targeting the plan sponsor of a $9 million 401(k) plan could be a sign that this litigation won't merely be relegated to the multibillion-dollar-plan market, but modestly sized plans as well.

“That one really got my attention,” Mr. Barstein said. “If that [suit] happens, the floodgates are open.”

The suit also comes as a new Labor Department regulation seeks to tamp down on unreasonable fees assessed to retirement investors. This “conflict of interest rule,” which takes effect in phases starting April 2017, will create fiduciaries of any adviser providing investment advice for a fee to retirement accounts such as 401(k)s and IRAs.

A Fidelity spokesman wasn't able to provide an immediate comment.

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