Fidelity Used Retirement Plan to Boost Its Mutual Fund Business, Class Action Suit Alleges

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A proposed class action lawsuit has been filed on behalf of participants in the Fidelity Retirement Savings Plan over allegations that the plan’s fiduciaries have failed to manage its assets in a “prudent and loyal manner.” The 59-page lawsuit names as defendants: 

Citing alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA), the complaint first argues that the potential for disloyalty and imprudence is more substantial when it comes to defined contribution retirement plans than with defined benefit plans. The lawsuit states that this is because participants’ employers and plan fiduciaries who oversee defined contribution plans have little to no incentive to keep costs at a minimum, nor to monitor every investment to ensure it remains reasonable. In a defined contribution plan, the suit says, participants’ benefits are limited by the value of the investments, which are in turn determined by external factors such as market performance. In sum, according to the suit, the risk with defined contribution plans can manifest two-fold with high fees coupled with poorly performing investments. Unfortunately, the case adds, employees are the ones who bear the brunt of any improprieties or downturns.

According to the lawsuit, Fidelity’s retirement savings plan had nearly $15 billion in assets as of the end of 2016. The suit alleges, however, that the defendants have failed to manage the plan with “the care, skill, or diligence” one would expect given the size of the plan. In truth, the defendants allegedly used the plan to promote Fidelity’s mutual fund business at the expense of participants. From the suit:

“The Fiduciary Defendants loaded the Plan exclusively with Fidelity-affiliated investments, without investigating whether Plan participants would have been better served by investments managed by unaffiliated companies. Perhaps worse, the Fiduciary Defendants have included almost every non-identical Fidelity mutual fund in the Plan’s investment lineup (hundreds in total), many of which were inappropriate offerings due to their poor performance, high fees, lack of diversification, or speculative nature.” 

As the complaint tells it, the effects of the defendants’ alleged imprudence have been “devastating” to plan participants. The case says that among the 20 largest defined contribution plans with more than $5 billion in assets in the country, Fidelity’s “performed the worst,” almost three times worse than average, “representing over $100 million per year in losses compared to the average plan.”

The complaint can be read below.