Lawsuit: Fidelity Lined its Pockets with Secret Kickbacks at 401(k) Participants’ Expense [UPDATE]

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A proposed class action filed in Massachusetts alleges that investment manager FMR (Fidelity Management & Research) LLC and several of its subsidiaries charge mutual funds secret fees for access to retirement plan customers, effectively profiting at the expense of investors when the allegedly unlawful fees are passed down in the form of plan expenses.

Filed by a California man whose T-Mobile 401(k) plan was managed by Fidelity, the case says the financial services conglomerate offers its retirement plans the opportunity to invest in third-party mutual funds. Beginning in 2017, Fidelity, the suit explains, required the mutual funds in its network to participate in an alleged “pay-to-play” scheme through which they made “secret payments” to Fidelity if otherwise disclosed fees, including 12b-1 and administration fees, fell below a certain amount. The suit claims that these kickbacks are deceptively characterized to Fidelity customers as mutual fund supermarket fees when, in reality, the payments are simply a replacement for declining revenue resulting from the “increasing use of passive mutual funds” that don’t amount to much profit for Fidelity. In alleged violation of federal law, Fidelity, the lawsuit alleges, does not disclose the amount of these payments, which are estimated to exceed hundreds of millions of dollars per year, and “forbids” the mutual funds from disclosing the amount, “despite their legal obligation to do so.”

The result of this allegedly undisclosed indirect compensation, the complaint explains, is an increase in mutual fund expenses, which are effectively deducted from the assets of the funds in which retirement plan participants invest. As a result, the suit says, Fidelity’s interests are at odds with those of their retirement plan customers, who suffer a loss of assets due to the defendants’ “self-dealing” behavior. From the complaint:

“[T]he receipt of such payments places Fidelity in a conflicted position in which the interests of its retirement plan customers can be and are sacrificed in the interest of Fidelity earning greater profits through the receipt of such payments.”