Fidelity dogged again by 401(k) quid-pro-quo allegations

Claims that have resurfaced about a mutually beneficial financial relationship between MIT and Fidelity are similar to one in a prior case

Aug 7, 2019 @ 2:10 pm

By Greg Iacurci

Fidelity Investments has again been accused of engaging in a quid-pro-quo type relationship with a 401(k) plan sponsor, which allegedly cost employee retirement savers millions of dollars in return for bigger profits.

The latest episode involves the Massachusetts Institute of Technology, which has been accused of retaining Fidelity's 401(k) record-keeping services and investment funds, despite counsel to do otherwise from attorneys and consultants, with the expectation that Fidelity and co-owner Abigail Johnson would make a large donation to the university.

A federal judge in Massachusetts had previously dismissed the quid-pro-quo allegation, but attorney Jerome Schlichter, who's representing MIT 401(k) participants in a lawsuit filed in 2016, is trying to reintroduce it due to new information from e-mails and other communications he claims to have unearthed during the discovery phase of litigation.

"That has revealed a clear pay-to-play arrangement between MIT and Fidelity," Mr. Schlichter said.

The situation, Mr. Schlichter said, is similar to one in an earlier lawsuit involving Fidelity and employer ABB, a multinational industrial technology company, that dates to 2006. Plaintiffs, represented by Mr. Schlichter, alleged ABB subsidized corporate services provided by Fidelity — such as payroll and record keeping for ABB's health insurance, welfare and pension plans — with employees' 401(k) savings. Fidelity lost money on these corporate services but made a "substantial profit" as 401(k) record keeper due to excessive fees, plaintiffs claimed.

"It was an arrangement between ABB and Fidelity whereby ABB employees paid excessive fees to Fidelity, and in turn Fidelity benefited the company," Mr. Schlichter said.

A federal court in Missouri dismissed the charges against Fidelity, which had been a defendant in the ABB lawsuit, but in 2012 upheld that this quid-pro-quo type relationship constituted a breach of fiduciary duty by ABB. An appellate court upheld the decision.

Neither Fidelity nor Ms. Johnson are defendants in the case against MIT, which is being sued for breach of its fiduciary duties.

"Nothing new has come to light that makes this story any more plausible now than it was then," Vincent Loporchio, a Fidelity spokesman, said of Mr. Schlichter's claims in the MIT lawsuit. "Consequently, we believe that these assertions are completely fictional and wholly irresponsible."

Further, Mr. Loporchio said, the court in the ABB case found that Fidelity didn't know how its fees on the defined-contribution plans and on the other services compared with market-based fees, and therefore couldn't have known that ABB officials were breaching any duties they had to the DC plans in that regard.

MIT spokeswoman Kimberly Allen called the quid-pro-quo allegation an "unsupported claim that has already been dismissed by the court very early on in the litigation."

The case is set for trial beginning Sept. 9.

Mr. Schlichter claims the partnership between MIT and Fidelity led the university to secure more than $23 million in donations from Fidelity since it became record keeper.

Despite recommendations from consultant Mercer and law firm Groom Law Group, the company retained Fidelity as the plan record keeper, continued using Fidelity's proprietary investment funds and didn't solicit competitive bids for services, Mr. Schlichter said. MIT wanted to protect its relationship with Ms. Johnson, Fidelity's co-owner and CEO and a lifetime member of MIT's board of trustees, according to a court document filed Aug. 5.

According to the filing, when MIT rejected the idea to conduct competitive bidding in 2015, the university's dean of the Sloan School of Management wrote the following e-mail: "But if we are not switching to Vanguard or TIAA-CREF, I am going to expect something big and good coming to MIT from the Johnson family."

Soon thereafter, Fidelity donated $5 million to MIT, which was the largest donation the school had received in over 15 years, the filing said.

Separately, Johns Hopkins University, another university sued by Mr. Schlichter for excessive retirement plan fees, agreed on Tuesday to settle its lawsuit for $14 million.

Jill Rosen, a university spokeswoman, said the settlement avoids the "expense and distraction" of prolonged litigation and that the school denies all allegations made in the case.

"We are confident that the university's retirement plan has been well and prudently managed, and is in compliance with ERISA and other applicable law," she said.

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