Fidelity sued for 'secret payments' in 401(k) plans

Fidelity allegedly pockets tens of millions of dollars a year from the undisclosed kickbacks, at the expense of its retirement clients

Feb 25, 2019 @ 2:08 pm

By Greg Iacurci

Fidelity Investments has been sued by a 401(k)-plan participant for accepting "secret payments" from certain retirement-plan business partners, allegedly allowing it to reap larger profits at the expense of its customers' retirement savings.

In this so-called pay-to-play scheme, Fidelity required mutual funds and other investment products offered through its FundsNetwork platform to make "kickback" payments if the revenue-sharing payments (such as 12b-1 fees) they made to Fidelity fell below a certain level, according to the class-action lawsuit.

Fidelity, the largest retirement-plan record keeper, makes tens of millions of dollars per year from the payments, which are not disclosed and are "deceptively characterized" to retirement-plan clients, according to the lawsuit, filed Feb. 21 in Massachusetts district court. The payments allegedly harm retirement savers by increasing the costs of the mutual funds.

"The receipt of such payments places Fidelity in a conflicted position in which the interests of its retirement plan customers can be and are sacrificed in the interest of Fidelity earning greater profits through the receipt of such payments," the lawsuit, Wong v. FMR LLC et al, claims.

Fidelity is violating the Employee Retirement Income Security Act of 1974, according to the plaintiff, Andre W. Wong, a participant in T-Mobile USA Inc.'s 401(k) plan, because ERISA requires disclosure of such indirect compensation.

Mr. Wong claims Fidelity started requiring mutual funds to pay these kickbacks around 2017 to make up for the decline in revenue sharing it was receiving as a result of the increased use of passively managed funds, collective investment trust funds, and different share classes such as institutional and R6 shares, which pay little to no revenue sharing to the record keeper.

"Fidelity emphatically denies the allegations in this complaint," said Fidelity spokesman Michael Aalto. "Fidelity fully complies with all disclosure requirements in connection with the fees that it charges."

Fidelity has been the target of other retirement-plan-related lawsuits over the past few years, at the same time that financial services firms more broadly have had to defend against an increase in 401(k) litigation. In October, Fidelity was sued for allegedly loading its own 401(k) plan with in-house investment funds. The asset manager had settled a similar lawsuit in 2014 for $12 million.

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