Constancy doesn’t act as ERISA trustee in amassing the entry price to mutual funds hosted on the retirement plan funding platform Hodgson Russ LLP

The First Circle appeals court has upheld a federal district court’s class action lawsuit dismissal against Fidelity, arguing that it violated its obligations as an ERISA trustee by charging “infrastructure fees” to mutual funds hosted on its investment platform.

Fidelity is a noted secretary and senior trustee providing services to thousands of U.S. retirement plans. Fidelity provides a “supermarket” of mutual funds that employer sponsors can choose from when compiling a list of the investments offered to retirement participants. Fidelity charges unaffiliated mutual fund managers an “infrastructure fee” in exchange for offering their funds on their platform, which gives those funds access to millions of retirement plan investors.

In assessing plaintiffs’ claims, the court found that ERISA escrow status was not an “all-or-nothing” designation. Plaintiffs argued that Fidelity acted as a functional trustee under ERISA, charging infrastructure fees for two main reasons: (1) because Fidelity had control over compensation from the pension plans, and (2) because Fidelity controlled the “supermarket” that was The investment decisions menu ultimately had an impact on the choice of pension funds offered to participants.

The court disagreed with plaintiffs’ theory that in collecting the infrastructure fee, Fidelity controlled the compensation that was passed on to the plans. This theory has been rejected because it overlooks “the numerous intervening and independent decisions associated with the so-called pass-through,” including the mutual funds decision to join the Fidelity platform and the negotiation of the fee, the decision the mutual fund whether the fee is to be passed on to the investors in whole or in part as an expense, the selection of the funds by the trustees of the pension plan, which should be included on the investment list of the pension plan, and finally the individual choice of the participant among the investment options of the plan.

The court next addressed the argument that Fidelity’s control of the “supermarket” indirectly controlled the funds that the pension plans offered to participants. Citing case law and a direct DOL opinion, the court rejected the argument that a plan service provider is acting as a trustee in the selection or removal of a fund from its program of investment offers. Indeed, Fidelity’s role as a directed trustee precluded any consideration of having a fiduciary advisory role in selecting the investment at the plan level.

The case indicates that retirement plan service providers are not performing functional fiduciary duties by simply maintaining an investment platform where authority over the investment options offered to participants is retained by the plan-level investment trustees.

With regard to: Fidelity ERISA Fee Litigation, 2021 WL 836766 (1. Cir. 2021)

Comments are closed.