Fidelity Investments has fought off a class-action lawsuit challenging its practice of charging third-party mutual funds for shelf space in its 401(k) record-keeping business, recent court records show.
The firm was initially sued in 2019 by several different groups of participants in the T-Mobile 401(k) plan, though those cases were eventually consolidated. The claims were unsuccessful, and the case was dismissed at the district court level early last year.
Plaintiffs appealed that decision, but the U.S. Court of Appeals for the First Circuit upheld the lower court’s ruling. The plaintiffs had maintained that Fidelity was a fiduciary to the plan in respect to the selection of investment options, but both courts did not buy that argument.
For more than two decades, the financial services firm has charged fund sponsors an “infrastructure fee” for their products’ inclusion in Fidelity’s supermarket, FundsNetwork.
“All in all, we see nothing here that calls for treating Fidelity’s charging of fees to some funds as an exercise of authority or control over any plan assets, management or administration,” the appellate court opinion stated.
“Fidelity is like a supermarket that charges a vendor a fee in return for favorable shelf space. No one would deem that fee to be compensation from the supermarket’s customers.”
The plaintiffs had argued that charging funds for access to plan participants ultimately leads to costs being passed along to retirement savers, but they did not provide proof of that, the court stated.
“We doubt that is so, at least absent a basis to conclude that Fidelity charges fees in a manner that affects a fund’s expense ratio for every investor or that both the law and the lack of market competition allow the funds in question to charge different investors undisclosed different amounts,” the opinion read.
A class-action lawsuit filed March 2 alleges that New York Life failed as a fiduciary in connection with the affiliated products on its employees’ and agents’ 401(k) menus.
Several of the MainStay funds included in the plans were more expensive than peers and underperformed relative to their benchmarks, according to the complaint filed in U.S. District Court in the Southern District of New York.
But the plaintiffs focus much of their energy on the fixed dollar account in the plan, which has served as the default investment, according to the complaint. That investment option, a group annuity contract, accounted for $2.36 billion, or 54% of the plans’ total $4.35 billion in assets as of the end of 2019, the plaintiffs noted. The investment option is not eligible as a qualified default investment option and should not have held any participant’s assets automatically placed into it for more than 120 days, they allege.
The investment was not good for participants because the guaranteed rate of return it offered was lower than that available in intermediate investment-grade bond funds, according to the complaint.
New York Life disputes the claims and will defend itself against them, a company spokesperson said in a statement.
“Our retirement plans are a valued and important part of the high quality, comprehensive benefit packages we provide to employees and agents,” the spokesperson stated. “We have a robust process in place for selecting investment options to include on the platform, including the use of an independent consultant, and we are in full compliance with our obligations to our retirement plan participants.”
Law firm Cohen Milstein Sellers & Toll represents the plaintiffs.
Two law firms are pursuing a class-action case against USI Insurance Service over allegedly excessive service fees its 401(k) participants have paid.
The insurer provides retirement plan services through its subsidiary USICG, including two other 401(k) plans that have negotiated more favorable rates, even if the plans are smaller, the plaintiff stated in the March 2 complaint.
Participants in the plan paid an average of $109 in service fees annually between 2015 and 2019, which was more than double that of comparably sized plans served by other providers, according to the complaint. The plan represented more than $847 million among than 9,500 participants as of the end of 2019, according to data from the Department of Labor.
The case was filed in U.S. District Court for the Southern District of New York. Law firms Franklin Azar & Associates and Chimicles Schwartz Kriner & Donaldson-Smith represent the plaintiff.
USI did not respond to a request for comment.
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