Fidelity Sued Over “Kickbacks” from Financial Engines

Employees of Delta Air Lines are suing Fidelity, their 401(k) provider, for allegedly illegal kickbacks from its “advice-for-hire” subcontractor, Financial Engines, RIABiz writes. Legal experts tell the web publication that the plaintiffs would have to prove that Fidelity is a fiduciary to win the case, an allegation that may be hard to support.

The suit alleges Fidelity is in breach of its fiduciary duty for accepting some of Financial Engine’s advice fee while not adding any value to earn that fee, RIABiz writes. Financial Engines — which is not named in the suit — is paying Fidelity 22.5 basis points, or exactly half of the 45 basis points charged by Financial Engines on Delta Family-Care Savings Plan accounts, which represent close to $8 billion in assets according to the plan’s 2014 federal filing cited by the web publication. Because the fee is split, according to the suit, Fidelity must be charging too much, RIABiz writes.

But Sheldon M. Geller, an attorney and president and managing member of Stone Hill Fiduciary Management, tells the web publication that Fidelity is merely the record-keeper and broker-dealer on the plan and doesn’t have fiduciary responsibilities, which lie with the plan sponsor. Fidelity is also likely to point out that Financial Engines charges up to 75 basis points for advice, according to its recent Form ADV cited by RIABiz. Joseph A. Garofolo, principal of Garofolo Law Group, who represents plan providers and participants alike, tells the web publication that cases challenging the sharing of revenue “have yielded mixed results for plaintiffs.”

The suit also alleges Fidelity is depriving plan participants from access to institutional-class shares, arguing that by aggregating funds from thousands of individuals Fidelity, as the record-keeper, is the sole investor in each mutual fund, RIABiz writes. There, too, legal experts tell the web publication the plaintiffs are likely to face legal obstacles. In addition, Fidelity is likely to argue that it also offers stocks, bonds, CDs and ETFs as well as several Vanguard Group funds that carry smaller expense ratios than other funds it offers.

Fees have become a major point of contention for plan sponsors, RIABiz writes. More than one-third of plan sponsors with at least $500 million in assets for the first time cite fees and expenses as the primary reason to drop an investment manager, according to a survey of 401(k) plan sponsors conducted by Market Strategies International and cited by the web publication. But Fidelity was ranked as third in line as “best value for money,” the survey found, RIABIz writes.

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