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Fidelity Retirement Plan Mutual Fund Kickbacks Class Action

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Participants in 401(k) plans must often pay fees to the mutual funds they invest in. The complaint for this class action alleges that various Fidelity companies required kickbacks from the mutual funds in its retirement plans, which then increased fees or decreased profits for the funds. The complaint claims that these secret payments violate the provisions of the Employee Retirement Income Security Act (ERISA).

The class for this action is all employee pension benefit plans covered by ERISA subject to Internal Revenue Code §§ 401(a) or 401(k) with which Fidelity has maintained a contractural relationship.

The various Fidelity companies involved, including FMR, LLC, Fidelity Management & Research Company, Fidelity Brokerage Services, LLC, and others, provide a “FundsNetwork” unit with third-party mutual funds and other investments available for some 24,000 retirement plans with assets of over $1.6 trillion. 

The problem began around 2017, the complaint says, when Fidelity began requiring “infrastructure” payments from the mutual funds, advisors, affiliates, other investment funds, and so on that were part of the FundsNetwork. The complaint alleges that these kinds of payments violate the prohibited transaction rules of ERISA. 

These fees are secret, the complaint said: “Fidelity receives these payments from mutual funds in the event that otherwise disclosed 12b-1 fees, administration fees, service fees, sub-transfer agent fees and/or similar fees (‘revenue sharing payments’ or ‘RSPs’) fall below a certain level…” It requires these payments to allow the funds access to its retirement plan customers.

Fidelity claims these are flat-dollar payments, the complaint says, but “the payments are, in fact, calculated based upon the assets the mutual funds maintain under management…” The complaint alleges that these are indirect payments that Fidelity should be disclosing under ERISA rules. “In fact,” the complaint says, “in a confidential document that Fidelity provides to mutual fund companies, Fidelity prohibits them from disclosing … to plan sponsors, plan beneficiaries and the public information concerning Fidelity’s ‘infrastructure’ fees, including the manner in which they are determined.”

The complaint says that “the amounts of these kickbacks bear absolutely no relationship to the cost or value of any … services and, instead, plainly are a replacement for declining amounts of revenue sharing payments received by Fidelity…”

The problem is, the complaint says, “the secret payments have the effect of increasing the expense ratios and/or other expenses of the mutual funds, which expenses are deducted directly from the assets of the Plans and their participants.” This is improper because Fidelity is a fiduciary, the complaint says, and should put the best interests of participants first.

The complaint claims violations of ERISA’s prohibited transaction rules and breach of fiduciary duty.

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