A new lawsuit against Fidelity Investment's recordkeeping unit alleges the firm received kickbacks from Financial Engines and captured unreasonable fees on mutual funds through a brokerage window provided to participants in Delta Airlines' 401(k) plan.
The suit alleges that Fidelity effectively serves as fiduciary to the plan because it both hired Financial Engines to provide advisory services to plan participants and negotiated the revenue-sharing terms with the Sunnyvale, California-based registered investment advisors. Financial Engines is not named as a party in the suit.
In a statement, a Fidelity representative said, "the allegations in this case are without merit, and we intend to defend against them vigorously."
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In order to have its advisor services offered through the Fidelity recordkeeping platform, Financial Engines agreed to pay a high percentage of its advisory fees back to Fidelity, as part of what the plaintiffs claim was a "pay-to-play" arrangement, according to papers filed in the U.S. District Court for the District of Massachusetts.
That arrangement resulted in the inflated cost of advisory services, and constitutes violations of the prohibited transaction provisions under the Employee Retirement Income Security Act, argue attorneys for the plaintiffs.
The advisory fees paid to participants who accessed Financial Engines' services were 45 basis points for the first $100,000 invested; 35 basis points for the next $150,000 invested; and 20 basis points for amounts in excess of $250,000.
The claim alleges Financial Engines pays 22.5 basis points of the fees to Fidelity, or half of the maximum advisory fee charge to plan participants.
"Fidelity's fee for whatever service, if any, it actually provides with respect to participants' use of FE's (Financial Engines') service is plainly unreasonable," according to court documents.
The plan's Form 5500 filings from 2009 to 2014 report that Financial Engines received direct compensation from participants for advisory services, but did not disclose Fidelity's alleged cut of the advisory fees.
Nor was Fidelity's share of the advisory fees disclosed directly to plan participants on their statements or as part of the Summary Plan Description, the suit says.
The claim also alleges Fidelity captured unreasonable compensation through retail shares of mutual funds offered through BrokerageLink, Fidelity's proprietary brokerage window offering.
In 2014, about 37.5 percent of the plan's roughly $7.6 billion in assets were invested through the brokerage window.
In 2009, revenue-sharing payments to Fidelity on the funds offered through the brokerage window ranged from 5 to 55 basis points, netting Fidelity several million dollars in revenue sharing fees since. In 2013, Form 5500 filings stopped listing the funds offered through the window by name.
Allegedly, Fidelity did not offer cheaper institutional shares of mutual funds through the brokerage window, instead choosing funds with higher expense ratios that "will pay Fidelity significant amounts in revenue sharing payments, effectively using the Plans' assets for its own benefit and for its own account," allege the plaintiffs.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
