On March 19, 2013, a former employee of Fidelity Investments filed suit in the U.S. District Court in Boston, Massachusetts against her former employer alleging self-dealing with respect to the management of the FMR LLC Profit Sharing Plan, Fidelity’s 401(k) plan. In September, twenty-six additional current and former Fidelity employees joined a proposed class action lawsuit against Fidelity. The complaint captioned, Bilewicz v. Fidelity Investments, alleges that the FMR LLC Profit Sharing Plain offered expensive Fidelity mutual funds despite the availability of lower-fee mutual funds within Fidelity’s own investment offerings and the offerings of outside providers.
Fidelity’s 401(k) plan holds approximately $8.5 billion in assets for more than 50,000 of its employees. Fidelity generally makes annual profit sharing contributions to the plan in addition to matching up to 7% of its employees’ salary contributions.
The Employee Retirement Income Security Act (ERISA) creates a fiduciary duty for 401(k) plans, meaning Fidelity, and any other 401(k) plan provider, must act in the best interest of its employee investors. The complaint in this case alleges that Fidelity and some of its officers failed to uphold thier fiduciary duty with respect to selecting, evaluating, monitoring, and removing investment options from the Fidelity 401(k) Plan. The complaint alleges that Fidelity and certain officers selected high-fee Fidelity mutual fund products that financially benefited Fidelity instead of acting in the best interest of their employees.
The Fidelity plan provides more than 150 investment options to its employees. However, all of these investment options are offered by Fidelity or a Fidelity subsidiary. According to the suit, nearly 85% of the 401(k) plan’s assets were held in actively managed Fidelity mutual funds at the end of 2010. These funds generally have higher fees than passively managed index funds.
In response to the suit, Fidelity filed a motion to dismiss arguing that employees have various investment options, including low-cost index funds. Fidelity representative Vincent Loporchio argued that the lawsuit was “totally without merit” and countered that “Fidelity has a very generous benefits package that provides significant contributions to our employee’s retirement planning.”
Additionally, a separate lawsuit, Kelley v. Fidelity Investments, was filed against Fidelity on February 5, 2013, in the U.S. District Court in Boston, Massachusetts, on behalf of 401(k) plans that use Fidelity mutual funds and plan administration services. Fidelity provides 401(k) plans for thousands of companies, serving approximately 12 million workers. This lawsuit is also seeking class action certification and alleges that Fidelity improperly took interest earned on contributions and withdrawals while the funds were pending investment or distribution.
Fidelity is not the only 401(k) provider to face issues relating to alleged self-dealing. Wells Fargo and Merrill Lynch were hit with similar allegations in 2011 and entered into multimillion dollar settlement agreements relating to self-dealing and excessively high fee claims respectively. Other firms, such as Fidelity competitor TD Ameritrade, do not even offer their employees the firm’s own 401(k) options and outsource their 401(k) plans to other investment firms in order to avoid the potential liability over self-dealing lawsuits.
By Julia Iodice