Benefits and Compensation

Plan Participants Again Sue Fidelity for Alleged ‘Self-Dealing’

Current and former 401(k) plan participants have sued Fidelity Investments on behalf of thousands of other plan participants and retirees to recoup account losses they say resulted from “self-dealing” by the huge asset manager. The case is worth plan sponsors’ attention because it closely resembles a widely watched 2012 ruling against Fidelity, Tussey v. ABB Inc., which displayed a federal court’s dim view of investment transactions that violate the ERISA fiduciary obligations

In Kelley et al. v. Fidelity (1:2013-cv-10222, U.S. Dist. Court, District of Massachusetts, Feb. 5, 2013), the plaintiffs, invested in separate employer retirement plans, are seeking class-action status on behalf of “hundreds of Plans and thousands of Plan participants throughout the country” that used Fidelity funds as a retirement investment option. Fidelity served as investment manager, trustee, advisor and/or administrator of the plaintiffs’ 401(k) plans.

As in Tussey, which Fidelity is now appealing, they allege the asset management firm earned “float income” from interest-bearing accounts where client plans’ assets were deposited temporarily before being invested or disbursed. The suit claims Fidelity used this income to pay itself fees beyond those authorized in trust agreements and for its own operating expenses, which is a prohibited transaction under ERISA for fiduciaries managing retirement assets. The interest income should have been credited to the contributions made by plan participants.

Specifically, the suit accuses Fidelity of using its “FICASH” Program’s process to gain income from sponsor contributions as they were received and held in overnight transaction vehicles before being invested. The Kelley suit seeks to recover that float income for affected plan participants nationwide.

In the Tussey decision, a judge in the U.S. District Court for the Western District of Missouri concluded that Fidelity’s actions violated its ERISA fiduciary duties by misallocating float income from two defined contribution 401(k) plans that ABB managed for employees — the personal retirement investment and savings management plan and the personal retirement investment and savings management plan for represented employees of the company. Collectively, these were known as PRISM plans. Because revenue made from assets of the PRISM plans was not allocated solely to its plan participants, the court concluded that the Fidelity defendants’ improper treatment of float income was in violation of ERISA.

Finding out More

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For more information on fiduciary duties, see ¶210 in The 401(k) Handbook.