Conflicts of interest 'pretty obvious,' lawyer says but firm says suit lacks merit.
New plaintiffs have joined a federal lawsuit against Fidelity Investments, alleging that the firm put its own workers into costly proprietary funds in the firm's profit-sharing plan even though cheaper options were available.
On Sept. 3, attorneys for Lori Bilewicz, a former Fidelity em-ployee, filed a first amended class action complaint against FMR LLC, the FMR LLC Investment Committee and a slate of John and Jane Does in the U.S. District Court for the district of Massachusetts. The class action is being brought on the behalf of participants and beneficiaries who were invested in Fidelity funds established and maintained by the firm through the plan from March 20, 2007, to the present.
In this latest rendition of the complaint, originally filed March 19, Ms. Bilewicz was joined by 26 other former and current Fidelity workers who were all participants in the company's own profit-sharing plan.
“The conflicts of interest are pretty obvious to the casual observer: [Fidelity] chooses the funds, and all 170 funds are Fidelity funds,” said Gregory Y. Porter, an attorney with Bailey & Glasser LLP.
He is representing the plaintiffs in the case.
“I don't see how you can have a best-of-breed process where your evaluation can result in 100% Fidelity funds,” Mr. Porter said.
The plan had 55,862 participants as of Dec. 31, 2011, with a total of $8.5 billion in assets.
Chief among the complaints is the allegation that Fidelity had engaged in “self-dealing at the expense of its own workers' retirement savings.”
Bolstering the case
Mr. Porter said that bringing additional plaintiffs into the suit bolsters the case.
“One of the objections raised in a motion to dismiss is that the current plaintiff at the time only owned four or five funds in the plan,” he said. “We've added a bunch of people in part to address that situation. Now we have dozens of funds and a mix of current participants and former employees.”
By adding on current plan participants, the plaintiff's attorneys can seek other solutions in addition to just a monetary award.
The case can push for changes to the plan, Mr. Porter said.
“The lawsuit is totally without merit, and we intend to defend vigorously against it,” said Vincent Loporchio, a spokesman for Fidelity. “We have a very generous benefits package that provides significant contributions to employees' retirement planning, including a profit-sharing contribution, a significant 401(k) match and contributions to help fund employee health expenses in retirement.”
The company offers “a wide array of choices, including low-priced institutional share classes and low-cost index funds,” Mr. Loporchio said.
Loading up the menu?
The plaintiffs allege that Fidelity loaded up the menu with its own funds such that at the end of 2010, 88% of the plan's mutual funds comprised actively managed proprietary funds. Those funds accounted for 84% of the plan's assets, the plaintiffs allege.
The workers also claim that Fidelity could have trimmed costs by consolidating funds in 2010. The plan would have been eligible to save money via break points available from Pyramis Global Advisors LLC, an institutional asset manager owned by Fidelity.
“Consolidating approximately 77 of the large-cap and sector equity funds in the plan into a single diversified large-cap option would create a pool of approximately $2.887 billion in assets as of Dec. 31, 2010,” the plaintiffs said in the suit. “With that much bargaining power, a prudent and loyal fiduciary could likely negotiate a fee with Pyramis or another asset manager of 20 basis points or less.”
The 77 equity funds in the above example charged an asset-weighted fee of 72 basis points, but if the plan ended up paying only 20 basis points on the $2.887 billion in large-cap-equity assets, the participants would have saved about 75% in fees, or $15 million just in that year, according to the complaint.
Ms. Bilewicz also claims that though Fidelity launched an index-based suite of target date funds in 2009, these options weren't available on the company's own 401(k).
The difference in cost was stark, according to the suit.
The index-based funds had average investment management fees of 9 basis points, 83% lower than the average cost of the Fidelity Freedom Fund K shares that the plan used.
Although Pyramis also offered an indexed-based target date series, Fidelity workers weren't offered this as an option, the plaintiffs allege.
The Pyramis Lifecycle Index charged a management fee of 15 basis points, 72% lower than the Freedom Funds that were available on the plan's menu, according to the lawsuit.
The plaintiffs seek disgorgement of investment advisory fees paid to Fidelity units, a restoration of plan losses and restitution, among other demands.
