Class-Action Complaint Challenges Fidelity Plan's Revenue-Sharing Arrangement


A recently filed class action complaint alleges that Fidelity Investments committed fiduciary breach and engaged in prohibited transactions with respect to its own profit sharing plan by failing to “recapture” certain revenue-sharing payments made by the plan's mutual fund adviser to the plan's record keeper, both of which are Fidelity entities (Yeaw v. FMR LLC,D. Mass., No. 1:14-cv-10035, complaint filed 1/7/14).          

According to the complaint, Fidelity “effectively charged its Plan thirty-five times what it should have charged its Plan” while disclosing “[v]irtually [n]othing” about this arrangement to plan participants.         

Although challenges to revenue-sharing arrangements have become more common in recent years, the participants' claims are somewhat unusual, because each of the entities involved in the alleged arrangement—the plan sponsor, mutual fund adviser and record keeper—are members of the same corporate family.         

The complaint was filed Jan. 7 in the U.S. District Court for the District of Massachusetts by two participants in the FMR LLC Profit Sharing Plan. They seek certification of a class of all plan participants from Jan. 8, 2008, until the present, which the complaint contends is “over 50,000” individuals. According to the participants, the Fidelity plan is “among the largest” defined contribution retirement plan in the country with about $9.5 billion in assets as of 2012.         

Revenue-Sharing Recapture          

The participants alleged that various Fidelity entities served as the sponsor, mutual fund adviser and record keeper for the plan. Pursuant to the internal revenue-sharing arrangement among these entities, the participants argued, the plan's adviser paid a share of the revenue it received from plan investments to the plan's record keeper to defray some or all of the plan's administrative costs.         

According to the participants, a “prudent and loyal fiduciary seeks to recapture revenue-sharing for its plan when such payments exceed the reasonable value of recordkeeping services.”         

However, the plan “did not receive a single dollar in revenue-sharing recapture,” the participants alleged. Instead, Fidelity arranged to “keep all revenue-sharing for Fidelity,” costing the plan and its participants about $90 million between 2008 and 2013, according to the complaint. During this time, the plan should have paid no more than $3.34 million in record-keeping fees, the participants contended.         

The participants alleged that Fidelity received an annual record-keeping fee of $335 per participant in 2012, with reasonable market fees being no more than $27 per participant. Further, the participants argued that Fidelity was legally prohibited from charging its plan “anything but its direct costs in providing recordkeeping services,” which the complaint estimated to be $10 per participant, per year.         

“If a plan the size of the Fidelity Plan is operated free of conflicts of interest and its fiduciaries choose a closed architecture investment platform and a heavy concentration of active equity funds, such as the Fidelity Plan did here, prudent, loyal, unconflicted, and thrifty fiduciaries obtain for their plans millions of dollars annually in revenue-sharing recapture,” the participants argued.         

“But the Fidelity Plan was operated by Fidelity, its subsidiaries, and their officers and managers. They ensured that the Fidelity Plan got nothing,” the complaint continued, alleging that Fidelity “essentially took $15 million a year from its own retirement plan.”         

The participants challenged these actions as violations of the Employee Retirement Income Security Act's rules governing fiduciary responsibility and prohibited transactions.          

“While it's not appropriate for us to comment on pending litigation, it is well known in the industry that Fidelity offers a very attractive benefits package including a 401(k) plan that matches eligible employee contributions to the plan, dollar for dollar, up to 7 percent of each eligible participant's compensation—a level of match enjoyed by only approximately 2 percent of 401(k) plan participants nationwide,” Vincent G. Loporchio, Fidelity senior vice president, told Bloomberg BNA Jan. 9.            

“In addition, Fidelity has traditionally made annual profit-sharing contributions of at least 10 percent of each eligible employee's total compensation,” Loporchio said.         

Tussey Case          

In their complaint, the participants cited a 2012 decision of the U.S. District Court for the Western District of Missouri that also involved Fidelity.         

The Tussey court found that the plan's sponsor—ABB Inc.—breached its fiduciary duties by failing to comply with the plan's investment policies, which specifically required ABB to use revenue-sharing rebates to offset the cost of providing administrative services to plan participants.         

The Missouri federal court said that ABB permitted Fidelity—the plan's record keeper—to take the revenue-sharing amounts to cover record-keeping costs without resulting in a reduction in administrative costs.         

In the Tussey ruling, the court said that “if a plan sponsor opts for revenue sharing as its method of paying for recordkeeping services, it must not only comply with its governing plan documents, it must also have gone through a deliberative process for determining why such a choice is in the Plan's and participants' best interest.”         

The Tussey court also faulted ABB for failing to “consider how the Plan's size could be leveraged to reduce recordkeeping costs.”         

The Fidelity plan participants bringing the instant lawsuit relied on these portions of the Tussey opinion to argue that, “[w]hen revenue-sharing payments exceed the market rate for the value of recordkeeping services, a fiduciary is obligated to seek rebates to the plan for the excess amounts.”         

The Tussey ruling has been appealed to the U.S. Court of Appeals for the Eighth Circuit, which heard oral arguments in September 2013.

Excerpted from a story that ran in Pension & Benefits Daily (1/9/2014).