A new complaint filed in the U.S. District Court for the District of Massachusetts names Fidelity entities and individual executives as defendants on multiple Employee Retirement Income Security Act (ERISA) claims.

According to a participant in the Publicis Benefits Connection 401(k) Plan, beginning in or about 2017, Fidelity began requiring various mutual fund and investment providers populating Fidelity’s FundsNetwork platform to make “secret payments” to Fidelity for its own benefit. According to the complaint, such “kickback payments” were presented “in the guise of infrastructure payments or so-called relationship-level fees in violation of, inter alia, the prohibited transaction rules of the Employee Retirement Income Security Act, as well as ERISA’s fiduciary rules.”

The complaint alleges the payments at issue “are part of a pay-to-play scheme in which 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 fall below a certain level and Fidelity requires payment of these kickbacks in return for providing the mutual funds with access to its retirement plan customers, including its 401(k) plan customers.” According to the plaintiff, who is seeking class action status, the practices of Fidelity go beyond permissible revenue-sharing under ERISA.

Fidelity offered the following statement in response to the filing of the lawsuit: “Fidelity emphatically denies the allegations in this complaint. Fidelity fully complies with all disclosure requirements in connection with the fees that it charges.  The infrastructure fee has been fully disclosed to 401(k) plans and their sponsors via a disclosure that Fidelity sent to over 20,000 401(k) plans, pursuant to Section 408(b)(2) of ERISA. We make thousands of non-Fidelity mutual funds available to 401(k) plans for which Fidelity acts as recordkeeper, as well as to other Fidelity customers. We receive a fee from some of those mutual fund companies to compensate us for maintaining the infrastructure that is needed to make those funds available.”

The complaint says Fidelity has not adequately met its duties under ERISA Section 408(b)(2).

“Fidelity does not disclose the amount of these secret payments, amounting to at least tens of millions of dollars per annum and likely in the hundreds of millions of dollars per annum, to the plans and forbids the mutual funds from disclosing the amount of these secret payments, despite their legal obligation to do so,” the lawsuit claims. “In fact, in a confidential document that Fidelity provides to mutual fund companies, Fidelity prohibits them from disclosing, either orally or in writing, to plan sponsors, plan beneficiaries and the public information concerning Fidelity’s ‘infrastructure’ fees, including the manner in which they are determined. In that document, Fidelity stressed that the dollar amount charged for the infrastructure fee is confidential, and that the fee is a flat dollar amount tied to the mutual fund company’s industry-wide assets, and not assets held only through Fidelity.”

According to the lawsuit, Fidelity is a functional fiduciary under ERISA by virtue of its discretion and exercise of discretion in negotiating/establishing its own compensation by and through its setting of the amount and receipt of the secret payments. Of note, related arguments about whether a retirement plan provider was acting in a fiduciary capacity when fulfilling service contracts were recently tested by an appellate court, which rejected them.

In this case, the plaintiff goes into significant detail about the process used by Fidelity to invest the dollars of individual retirement plan participants, noting how, in return for recurring contributions, which are assets of ERISA-qualified plans, the plans and their participants receive accumulation units (shares) in the applicable sub-accounts of the Fidelity omnibus accounts. The accumulation units/shares, like the omnibus accounts themselves and the sub-accounts, are held and owned by Fidelity. The lawsuit suggests the fact that Fidelity maintains discretion, authority and control over the omnibus accounts, the sub-accounts and the accumulation units, confers upon it various fiduciary duties under ERISA.

The plaintiff backs up this line of argument by suggesting that Fidelity “also maintains complete discretion to substitute, eliminate and add mutual funds offered through its FundsNetwork by and through its omnibus accounts, as well as to make other investment decisions on behalf of the plans.”

In February, a participant in the T-Mobile USA, Inc. 401(k) Retirement Savings Plan and Trust filed a similar suit against Fidelity and several of its affiliates, claiming the firm engaged in prohibited transactions by charging a “secret” fee for mutual funds and engaging in self-dealing. In a statement provided at the time to PLANADVISER, the firm emphatically denied the allegations, saying it fully complies with all disclosure requirements in connection with the fees that it charges. A second similar lawsuit was filed in March.

The full text of the new complaint is available here.

Last year, the fee and fund access practices of the firm gained increased industry attention when Fidelity made the announcement that it would begin charging a 0.05% fee on assets invested through its institutional retirement plan recordkeeping platform into Vanguard products, including the firm’s popular suite of index-based target-date funds (TDFs) and collective trusts. The announcement grabbed attention in part because Fidelity and Vanguard are two of the largest-volume providers of retirement plan recordkeeping and investment products for defined contribution retirement plans in the U.S. In addition, industry observers said the new fee reflected the hard-nosed competition that defines the retirement plan recordkeeping and brokerage industries.