Fidelity always seems to garner attention—whether it’s controversy over supposed quid pro quo or zero-fee fund options.
The Boston-based investment behemoth also took the top spot in reader interest for 2019 in fiduciary litigation (of the threat thereof), with an inquiry from Massachusetts Secretary of the Commonwealth William Galvin about the company’s policy on 401k access fees.
Specifically, Galvin wanted to know more about how it charges other fund companies for “shelf space” in the plans it administers.
Fidelity is currently the country’s largest recordkeeper.
“The Securities Division sent preliminary inquiry letters to Fidelity and to certain funds on the Fidelity Funds Network platform on February 27th,” Debra O’Malley, a spokesman for Galvin’s office, said in an email. “While they are not releasing the letter at this time, the letter requested information that included:
- The identity of all Massachusetts pension and retirement plans where Fidelity is a fiduciary or service provider;
- Details of all fees payable by funds to Fidelity;
- Details about contact persons at Fidelity;
- A description of the “infrastructure fee” payable by funds on the network;
- The identity of the Fidelity units that receive the infrastructure fee; and
- Whether the infrastructure fee is disclosed to investors and, if so, how that disclosure is provided.
The news came on the heels of a Feb. 21 lawsuit filed by a plan participant in T-Mobile USA Inc.’s 401k plan, which Fidelity administers, alleging hidden “infrastructure” fees.
Department of Labor also investigated
The Department of Labor also investigated the fees.
“The annual charge …is aimed at companies selling shares on the asset manager’s fund platform, and was described in a 2017 internal Fidelity document,” The Wall Street Journal noted. “The fee, which appears to have been implemented in 2016, is ‘designed to ensure that each Fund Firm meets a minimum required payment to Fidelity.’ By marking the charge as an infrastructure fee, the fund firms may be able to avoid disclosing it to investors.”
It added that the infrastructure fee appears to be a way for Fidelity to make up for revenue the firm has lost as a result of investors flocking to reduced-cost mutual funds, a situation the firm refers to in the document as “unsustainable economics.”
Fidelity also stated in the document that its traditional business model is “broken” and characterized the infrastructure fee as a solution to that problem, according to the Journal.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
