Fidelity Sued (Again) Over Alleged 401(k) Fiduciary Breach

What, if anything, did Fidelity do wrong in its 401(k) business?
What, if anything, did Fidelity do wrong in its 401(k) business?

The latest case to throw cold water on 401(k) fees involves Delta Airlines, Fidelity Investments, and (of all things) Financial Engines.

The latter was founded by 1990 Nobel Prize in Economics winner Bill Sharpe of Sharpe Ratio fame, which as any advisor apprentice knows is a method for determining risk-adjusted return.

A proposed class action suit accuses (who else) Fidelity Management Trust Co. of breaching its ERISA fiduciary duties. Specifically, it targets Fidelity for “allegedly receiving unreasonable compensation through its brokerage window feature and a kickback scheme with an investment advice company” in a Delta Airlines employee 401(k) plan it manages, according to Bloomberg BNA.

Neither Delta Airlines nor Financial Engines are named in the suit.

The complaint, filed on May 20, claims Fidelity selected mutual funds with higher expense ratios for the plan’s brokerage window that allowed the investment firm to charge “significant amounts” in revenue-sharing payments for doing little.

“The allegations in the complaint are without merit and Fidelity will defend against them vigorously,” Stephen Austin, a spokesman for Fidelity, told Bloomberg BNA May 23.

Participants accuse Fidelity of earning unreasonable compensation by engaging in a kickback scheme with Financial Engines Advisors, LLC for providing investment advice services.

In order to be included as the investment advice service provider on Fidelity’s platform, Financial Engines allegedly agreed to pay—and still pays—Fidelity a significant percentage of the fees it collects from 401(k) participants.

These fees weren’t being paid for any substantial service being provided by Fidelity to Financial Engines or to participants, the complaint says.

Moreover, the complaint alleges that Fidelity was “doing nothing more than providing an electronic mechanism for implementing instructions the participants could implement on their own.”

SEE ALSO:

Empower Sued for Another Company’s 401k Mistake?

401k Float: The Next Tort Lawsuit Target

John Sullivan
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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.

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