Fidelity Defeats 401(k) Self-Dealing Claims in First Circuit

March 6, 2021

Fidelity Investments scored a big legal victory Friday, when the First Circuit ruled that the company can’t be liable as an ERISA fiduciary for charging “infrastructure fees” to the mutual funds that appear on its 401(k) investment platform.

The court’s decision turned on whether Fidelity—whose FundsNetwork platform provides investment options for tens of thousands of retirement plans—acts as a fiduciary under the Employee Retirement Income Security Act with respect to these retirement plans when it collects infrastructure fees from the funds on the platform.

Participants in T-Mobile USA’s 401(k) plan claimed the fees Fidelity charges mutual funds are ultimately passed on to retirement plan investors, which causes Fidelity to become an ERISA fiduciary by virtue of its ability to set its own compensation from these plans.

The U.S. Court of Appeals for the First Circuit disagreed, affirming a Massachusetts federal judge who dismissed the case last year.

“Fidelity is like a supermarket that charges a vendor a fee in return for favorable shelf space,” the court said. “No one would deem that fee to be compensation from the supermarket’s customers.”

The lawsuit accused Fidelity of running a secret “pay-to-play scheme” that charges certain mutual fund providers undisclosed kickbacks in order to stay on the FundsNetwork menu.

Plan participants said the kickbacks are charged when a fund’s investment management fees—so-called 12b-1 fees, which must be publicly disclosed—fall below a certain level. Fidelity was accused of adopting the scheme in 2017 as an effort to shore up declining revenue streams caused by investors’ increasing use of passive mutual funds, which carry lower administrative fees than actively managed funds.

The plan participants also argued that Fidelity became an ERISA fiduciary based on its ability to add or remove funds from the FundsNetwork platform. The First Circuit disagreed, saying “case law almost directly on point flatly rejects plaintiffs’ notion” and citing similar rulings from the Third and Seventh circuits.

Judge William J. Kayatta Jr. wrote the decision, which was joined by Judge David J. Barron and Judge William E. Smith, sitting by designation from the U.S. District Court for the District of Rhode Island.

The investors are represented by Shepherd, Finkelman, Miller, & Shah LLP, Pastor Law Office, and McGillivary Steele Elkin LLP. Fidelity is represented by O’Melveny & Myers LLP and Goodwin Procter LLP.

The case is In re Fidelity ERISA Fee Litig., 1st Cir., No. 20-1286, 3/5/21.