Boston-based Fidelity Investments is being sued by a 401(k) plan participant over undisclosed fees it collects from mutual funds.
The suit, Wong v. FMR LLC et al, was filed in the U.S. District Court for the District of Massachusetts on Feb. 21. The claimant, Andre Wong, a participant in a T-Mobile USA 401(k) plan, alleges that Fidelity violates the Employee Retirement Income Security Act of 1974, commonly referred to as ERISA, when it accepts “secret payments” from retirement-plan business partners that allow it to take larger profits.
Fidelity requires third-party funds offered through its funds network to make additional payments if revenue-sharing payments fall below a certain level.
In a spokesperson’s statement Tuesday, Fidelity was adamant that it was operating above board.“Fidelity emphatically denies the allegations in this complaint. Fidelity fully complies with all disclosure requirements in connection with the fees that it charges.”
The suit, a proposed class action, alleges that Fidelity annually makes at least tens of millions of dollars from the payments, which started in or near the year 2017 to address the decline of revenue sharing from the use of passive mutual funds, collective investment trust funds and share classes that include little or no revenue sharing. Wong’s claim alleges that the fees are not directly related to any additional services that Fidelity offers to retirement plans or their participants.
According to the suit, the payments violate ERISA’s prohibited transaction rules, creating a pay-to-play scheme between Fidelity and third-party mutual fund companies.
The lawsuit also complains that payments are not disclosed to retirement plan participants. ERISA requires disclosure of all indirect compensation to plan participants. The suit also alleges that Fidelity prohibits mutual funds from disclosing the payments. According to Wong’s claim, Fidelity characterizes the payments as a flat dollar amount, but they are actually tied to the assets under management in the respective mutual funds.
Since the payments inflate the expense ratios of mutual funds, the suit argues that they harm retirement plan participants. Wong’s claim also alleges that Fidelity engaged in self dealing by paying itself kickback fees from assets contained in retirement plans’ omnibus accounts.
The suit also alleges that Fidelity breached its duty as a retirement plan fiduciary.
Wong is asking that Fidelity pay disgorgement of damages, remedial relief, pre-judgment and post-judgment interest and attorney fees.