Fidelity liable for some 401(k) claims: Court

A class-action lawsuit brought by participants in Fidelity Investments’ own 401(k) plan just got a step closer to a trial.

On Friday, a federal judge ruled that the company is liable for ERISA claims resulting from the company’s alleged failure to monitor plan fiduciaries. But Fidelity is not liable for the other claims leveled against it, the judge ruled.

The lead plaintiffs in the 2018 suit allege that Fidelity breached its fiduciary duty by packing its 401(k) menu with the firm’s line of proprietary mutual funds. Fidelity benefited through self-dealing, the plaintiffs claimed.

The company was sued over some of the same issues in the past and settled that class-action case in 2014 for $12 million. As part of the agreement, the company made changes to benefit participants, such as rebating back to them the revenue-sharing fees charged by mutual funds, according to court records.

However, the company later took the step of adjusting its discretionary profit-sharing contribution to participants “based on the amount returned to each account through the revenue credit,” the judge noted. “This leads the plaintiffs to call the implementation of the revenue credit an ‘accounting gimmick.’”

Fidelity also agreed in the settlement to begin fiduciary monitoring of its two default investment options and open the plan up to third-party funds via a brokerage window.

Fidelity’s 401(k) represented more than $16 billion in assets among about 58,000 participants at the end of 2018, according to Department of Labor data aggregated by BrightScope.

The recent court order found that Fidelity “breached its duty of prudence by failing to monitor its mutual fund investments and by failing to monitor record keeping expenses.” However, the judge found that the company did not violate the Employee Retirement Income Security Act by failing to consider alternatives to mutual funds for its plan, such as collective investment trusts.

Nor did the company breach its duty of loyalty to plan participants, and it did not engage in prohibited transactions “because its dealings with proprietary products were no less favorable to the plan as a whole than to other shareholders of Fidelity funds,” the judge wrote.

But Fidelity is liable for failing to monitor the plan fiduciaries’ handling of mutual fund investments and record-keeping expenses, which means the plaintiffs could be able to recover money stemming from those claims, according to the order. The claims do not extend to the default investments on the plan menu, such as the target-date funds.

“At trial, the plaintiffs will bear the burden of proving the extent of any losses, and Fidelity will bear the burden of proving that any losses to the plan were not caused by the lack of monitoring,” the judge wrote.

A spokesperson for Fidelity stated in an email that the company “respectfully disagree[s] with the opinion.”

“Fidelity has a generous 401(k) plan, including a dollar for dollar match up to 7%, as well as profit sharing,” the spokesperson wrote. “There are many steps ahead in the litigation, so the case is far from over. In the meantime, we will continue to provide a high quality and generous 401(k) plan to our employees.”

Fidelity has also raised a statute of limitations defense that has not been ruled on.

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