Heard Off the Street: Fidelity investors feel shortchanged

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Depending on the source, financial services giant Fidelity Investments either offers employees one of the best retirement savings plans available or has little regard for its fiduciary responsibilities when it comes to tending to their nest eggs.

The latter view is being advocated by lawyers representing some of the more than 54,000 participants in the $9.5 billion FMR Profit Sharing Plan. They have filed two federal lawsuits against the Boston-based company, alleging it violated its fiduciary responsibilities by offering only Fidelity mutual funds in the plan and offering too many investment options, including new, unproven mutual funds.

They also accuse the Fidelity affiliate that manages the mutual funds of not sharing enough of the fees it collects from plan participants with another Fidelity affiliate that keeps the retirement plan's records.

"This case is about a company's self-dealing at the expense of its own workers' retirement savings," they stated in a court filing in September.

As conflicted as Fidelity may appear to be, lawyers schooled in benefits law said the allegations do not necessarily mean the company did anything wrong.

"The conflict in and of itself isn't illegal," said Jeffrey Herrmann with Cohn Lifland Pearlman Herrmann & Knopf in Saddle Brook, N.J. "It may raise suspicions, but you don't win a case by saying that."

Mr. Herrmann, who represents investors in these types of cases, said that based on his reading of the lawsuits, "I don't see factually that they are doing to be able to prove breach of those fiduciary duties."

U.S. Labor Department regulations allow mutual funds and other financial services companies to offer their products and services to their employees, according to Jason D'Angelo, a lawyer for Herrick, Feinstein in New York. He said the cases hinge on whether Fidelity acted prudently in analyzing and selecting investment options, and whether the fees were reasonable.

Fidelity spokesman Vincent Loporchio declined to comment on the lawsuits.

In an emailed statement, Mr. Loporchio said Fidelity provides a dollar-for-dollar match for up to 7 percent of an employee's compensation for the 401(k) portion of the $9.5 billion plan. Only 2 percent of companies that sponsor 401(k) plans are that generous, he said. In addition, Fidelity also traditionally contributes at least 10 percent of an employee's compensation to the profit-sharing portion of the plan, he said.

Fidelity has asked the judge to dismiss the first lawsuit. It was filed last year by most of the same law firms behind the lawsuit filed this month.

Two key issues in the complaints are Fidelity's use of its own investment funds in the plan and the relationship between Fidelity Management, which manages the participants money, and Fidelity Operations, the record-keeper hired to provide administrative services for the plan.

In the initial lawsuit, the lawyers cited studies showing that only 10 percent of 401(k) plans restrict their investment options to a single manager. "Prudent and unconflicted plan fiduciaries know or should know that no one investment fund family provides the very best investment fund options across all asset classes," they argued in a September filing.

They also faulted Fidelity for offering more than 160 of its own funds as options, saying many in the industry do not consider that to be best practice. Doing so prevented participants from taking advantage of "break points" that reduce management fees once assets in a particular fund exceed prescribed levels, according to the most recent lawsuit.

In documents supporting its motion to dismiss the first lawsuit, Fidelity cited the same Labor Department exemption that Mr. D'Angelo did. The investment firm said two appeals courts "have endorsed plan lineups consisting almost exclusively of Fidelity mutual funds" when lawyers for investors made similar allegations in other lawsuits.

It said the wide array of investment options allows employees to "determine the best path for meeting their own retirement goals and objectives."

The fee allegations center on whether Fidelity's record-keeping arm negotiated aggressively enough with Fidelity's management arm. Fund managers traditionally share with record-keepers some of the fees they collect from investors. That offsets the costs of administering the retirement plan.

Lawyers for the Fidelity employees say hiring affiliates of the same company to do both jobs poses conflicts of interest. They allege that meant Fidelity pocketed $85 million or more in fees between 2008 and 2012 that should have been rebated to the plan.

In court documents, Fidelity said it has contributed more than $2 billion to the retirement plan since 2007, or about 10 times more the amount of excessive fees the lawyers alleged in the first lawsuit.

The lawsuits aside, a San Diego firm that ranks 401(k) plans based on more than 200 criteria said Fidelity's plan falls within the top 15 percent of plans nationwide. BrightScope said the 194 investment options Fidelity offers to its participants compares with the national average of 24.

However the court rules, the lawsuits are sure to make Fidelity's employees more aware of the terms of their 401(k) plan. That's something all 401(k) participants would benefit from.


Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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