Without Infrastructure Fees, Recordkeepers Would Go Out of Business

Fidelity Investments has moved to dismiss a consolidated lawsuit alleging it is receiving “secret” or “kickback” payments from providers on its FundsNetwork platform.

Several lawsuits filed against the firm claim the payments were presented as infrastructure payments, or so-called relationship-level fees, in violation of the prohibited transaction rules of the Employee Retirement Income Security Act (ERISA), as well as the statute’s fiduciary rules. Participants in 401(k) plans sponsored by clients of Fidelity say the payments are part of a pay-to-play scheme.

However, in a memorandum in support of its motion to dismiss, Fidelity argues that it is entitled to negotiate and collect these fees, and that siding with the plaintiffs in the consolidated lawsuit would be detrimental to retirement savers.

Fidelity says this case is no different than the numerous prior ERISA class actions brought against Fidelity in which plaintiffs have sought to hold Fidelity accountable for collecting similar fees. It notes that in all of those cases, and in many similar cases brought against other service providers, courts have dismissed plaintiffs’ claims, holding that there was nothing unlawful about the payments received.

According to the memorandum, this is because the provisions of ERISA allow private parties to recover only for breaches of fiduciary duties, but when a platform or service provider (such as Fidelity) negotiates its own compensation with an arm’s length counterparty, it is not acting as a fiduciary to the 401(k) plans it services or to any other investor, but is acting in its own interests.

“This has to be the rule, because if service providers were deemed fiduciaries to 401(k) plans when negotiating their compensation, they would be required to negotiate with the ‘best interests’ of the plans in mind, meaning that they could not charge the plans anything more than cost, and that they would have to agree to credit to the plans any excess compensation received from third parties. And, if that were the case, there would be no providers left in business,” Fidelity argues.

Fidelity says it’s clear from public record that retirement plan service providers operate at increasingly thin margins, and to continue in business they must negotiate arrangements that allow them some amount of profit.

Fidelity said maintaining its FundsNetwork is expensive and listed services included that make it so. It also said that if the case were to proceed to discovery, it would undercut virtually all of plaintiffs’ allegations, showing that that most of Fidelity’s customers who invest in funds sponsored by companies that pay infrastructure fees are retail or institutional customers, and not Fidelity-recordkept retirement plans like those on whose behalf plaintiffs purport to sue; and that the infrastructure fees were not a “secret,” but rather disclosed to all investors; among other things.