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Fidelity Investments Infrastructure Fee Draws Scrutiny


Expert Witness: ERISA Benefits Consulting, Inc.
Fidelity Investments is the subject of a Department of Labor investigation regarding an annual “infrastructure fee” imposed on third-party firms that sell their own mutual funds on Fidelity’s FundsNetwork platform, according to a February 2019 article in The Wall Street Journal titled, “Government Probes Fidelity Over Obscure Mutual-Fund Fees.”

The central question under review is whether Fidelity attempted to avoid adequately disclosing the fee to investors and plan sponsors by marking it as such. Fidelity started to implement the fee in 2016, according to industry reports.

A lawsuit focusing on the same issue was filed in U.S. District Court for the District of Massachusetts on March 18, 2019. In the matter Summers et al v. FMR LLC et al (Case No. 1:19-cv-10501), plaintiffs allege that Fidelity’s imposition of what plaintiffs claim is an illegal “pay-to-play” fee on participating non-Fidelity mutual funds and other investment companies constitutes a breach of Fidelity’s fiduciary duties
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under the Employee Retirement Income Security Act (“ERISA”). Plaintiffs further claim that the fee increases expense ratios that are then passed on to 401(k) plan participants.

While the Department of Labor has not confirmed the existence of an ongoing investigation as of this time, a spokesperson for Fidelity is quoted as saying that the company “receive[s] a fee from some of those mutual-fund companies to compensate [Fidelity] for maintaining the infrastructure that is needed to make those funds available.” That underlying infrastructure includes “systems and processes for record-keeping, trading and settlement, making available regulatory and other communications, and providing customer support online and through phone representatives.”

The Fidelity spokesperson would not confirm whether there is an ongoing investigation into the infrastructure fee, but according to published reports he reportedly did provide that the company “fully complies with all disclosure requirements in connection with the fees that it charges.”

The infrastructure fee reportedly is applied to lower-cost share classes, which may include retirement accounts that are subject to disclosure rules under the Employee Retirement Income Security Act. However, the spokesperson said the fee is paid by mutual fund companies, not retirement plans.

Funds are prohibited from making payments to finance distribution. Instead, Fidelity’s internal documents characterize the fee as one for shareholder services which do not require disclosure under a 12b-1 plan.

In 2015, First Eagle Investment Management settled similar SEC charges for nearly $40 million when it allegedly paid for distribution outside of a 12b-1 plan with $25 million in fund assets.

Fidelity’s infrastructure fee is also at the center of a proposed class action lawsuit brought last month in the U.S. District Court for the District of Massachusetts by a participant in T-Mobile US, Inc.’s retirement plan. Plaintiff Andre Wong argues Fidelity violated its fiduciary duties by engaging in self-dealing and that the “secret payment” is a prohibited transaction under ERISA.

The suit alleges Fidelity engaged in an illegal pay-to-play scheme where other mutual fund companies made “kickback” payments if they failed to meet a certain level of revenue-sharing payments. Wong also asserts that Fidelity failed to properly disclose such fees to participants in those retirement plans and that participating mutual funds were incentivized to “conceal the true nature of fees associated with these funds.” Fidelity denies these allegations.

As we have reported in previous articles, excessive fees and self-dealing are two of the largest categories of complaints that trigger 401(k) lawsuits. Inappropriate investment choices are the third major source of ERISA litigation.

The Employee Retirement Income Security Act of 1974 governs the administration of 401(k) plans, and the U.S. Department of Labor (DOL) is charged with enforcing ERISA. Rather than publishing specific guidelines that plan fiduciaries must follow, however, the DOL has often chosen to take enforcement actions after plan participants file litigation challenging the actions of plan fiduciaries.

According to the U.S. Securities and Exchange Commission, 12b-1 fees relate to distribution and shareholder service expenses that are paid by a mutual fund out of fund assets. These 12b-1 fees get their name from the SEC rule that authorizes a fund to pay them. A fund must have a 12b-1-plan in place in order to pay distribution fees out of fund assets.



ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778.

ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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