Fidelity Is Sued Over 401(k) Fees

Wall Street Journal
Mutual Funds: Fund Track

Proposed Class Action Aims at Disclosure Practices Regarding Revenue Sharing

By Tom Lauricella 

Fidelity Investments is the latest target of what has become a growing number of lawsuits filed against 401(k) retirement plans alleging that participants were charged improper, undisclosed and excessive fees.

The lawsuit against Fidelity, filed late Friday in US District Court Western District of Wisconsin, took aim at its management of the 401(k) plan for farm equipment manager Deere & Co. of Moline, Ill., which was also named in the complaint. Fidelity acts as trustee and record-keeper for the plan and manages the funds offered to participants. The fees charged the participants in the Deere plan "were and are unreasonable and excessive, not incurred solely for the benefit of the plan and its participants and undisclosed to participants," the suit says.

A spokesman for Fidelity said, "We disagree with many of the factual and legal assertions in the complaint and we intend to defend against the suit vigorously."

A spokesman for Deere said the firm was in the process of reviewing the complaint but will "defend the company aggressively in this matter."

This action, which is seeking class-action status, brings to 11 the number of 401(k) plans being sued on behalf of plan participants by St. Louis law firm Schlichter Bogard & Denton. The repeated claim is that investors were harmed by a commonplace industry practice where investors are indirectly charged for services provided to the plan. This is accomplished by a plan administrator sharing with other service providers a portion of an overall fee charged investors, a practice known as revenue sharing. The suits allege that these revenue-sharing payments are not properly disclosed, or in some cases, not disclosed at all.

The latest suit alleges that one-third of the fees collected by Fidelity go toward revenue sharing.

The suits also allege the fees, which are assessed via a flat percentage fee, are excessive. "As the years pass, and as participant's retirement savings grow, the amount of money available for revenue sharing payments increases, even though no additional services may be provided to the plan," the suit says. In addition, the complaint contends that Deere has failed to inform participants of a "long-standing agreement" with Fidelity to only choose Fidelity funds.

The Fidelity spokesman said the company believes it provides "valuable services to 401(k) clients for whom Fidelity serves as record-keeper and a trustee. We believe that the fees ... collected by Fidelity for those services are reasonable." He added that "Fidelity retail mutual funds consistently rank against their ... peers as among the lowest priced mutual funds."

Filing the suit against Fidelity "appears to be a new tactic," says Gregory Ash, an attorney who specializes in retirement-plan law. It is "primarily an attack on revenue sharing. If plaintiffs get the relief requested, which includes disgorgement of the revenue sharing and an injunction on this practice in the future. Fidelity will likely be forced to completely revamp its fee structure for plans like this."

Jerome Schlichter, who filed the suit, says Fidelity was named because it is a fiduciary of the Deere plan. He declined to say why the other 10 cases didn't target the money managers that run those plans. But Fidelity isn't completely alone; other suits have been filed in recent weeks targeting plan administrators for revenue sharing.