Fidelity to Settle Excessive Fee Suits

Under the settlement agreement, without admitting any wrongdoing, Fidelity will pay up to $12 million to settle the suits, with the first payment being made to an escrow account in the amount of $1.2 million within 10 days of preliminary approval of the settlement by the court. In addition, the settlement calls for the following affirmative relief:

• The default investment option under the plan shall be the Fidelity Freedom Funds-Class K;

• The plan shall allow plan participants access to a large number of Fidelity and non-Fidelity mutual funds;

• For employees eligible for a company match of 7% of deferrals, the automatic enrollment default deferral rate under the plan shall be raised from 3% of eligible compensation to 7% of eligible compensation, and current participants who are deferring less than 7% of pay will be defaulted to a 7% deferral rate; and

• The plan shall provide that revenue sharing attributable to non-Fidelity mutual funds shall be credited to participants in the same way as revenue attributable to Fidelity mutual funds and collective trusts as spelled out in the eighth amendment to the 2005 restatement of the plan. This revision to the plan will remain in effect for at least three years.

In a statement, Fidelity told PLANADVISER, “We believe both lawsuits are entirely without merit. However, litigation imposes substantial costs. We determined that settling these cases is in the best interest of our employees and our business. Since the substantial majority of the $12 million settlement (after costs and expenses) will be allocated to Fidelity employees, we believe that it is better for our employees to receive that financial benefit rather than have the company expend a substantial amount on litigation. 

“Fidelity has a long history of providing our employees with competitive compensation and benefits, including our retirement program with a dollar for dollar 401(k) match of up to 7% of a worker’s salary. This level of match is enjoyed by only approximately 2% of 401(k) plan participants nationwide. In addition, Fidelity has traditionally made annual profit-sharing contributions of at least 10% of each eligible employee’s total compensation. (This is added to employees’ 401(k) accounts.)”

The agreement settles two lawsuits filed by Fidelity 401(k) plan participants. In Bilewicz v. FMR LLC (see “Fidelity Accused of Self-Dealing in New Lawsuit”), the plaintiff claims the proliferation of Fidelity funds in the plan caused the plan and participants to incur unusually high expenses, to the benefit of Fidelity. It also says the defendants maintained the plan’s investment in high-fee Fidelity target-date funds (TDFs) when Fidelity affiliates offered lower-fee and better-performing TDFs. According to the complaint, the pattern of adding new Fidelity funds to the plan demonstrates severe conflicts of interest.

The second suit, Yeaw v. FMR, LLC (see “Fidelity Faces Lawsuit over Revenue Sharing”), focuses on Fidelity’s treatment of revenue-sharing payments, arguing “Defendants caused the Plan to forego tens of millions of dollars in revenue-sharing rebates that Fidelity kept for itself.” According to the complaint, in 2012, the Fidelity plan had approximately 71% of its investment assets in actively-managed Fidelity mutual funds. All the funds are managed by an affiliate of the recordkeeper. Instead of negotiating a revenue-sharing recapture arrangement favorable towards participants, plan fiduciaries arranged with Fidelity Operations and Fidelity Management to keep all revenue sharing for Fidelity, the complaint contends, saying this arrangement cost the Fidelity plan and its participants approximately $15 million a year for the years 2008 to 2013.