As reported in Investment News[1], a group of employees at Fidelity Investments, one of the country’s largest retirement plan providers, is suing the company for allegedly stuffing its own company retirement plan with high-cost, actively-managed mutual funds. The proposed class action further alleges Fidelity violated its fiduciary duty to retirees by restricting fund choices to only those managed by Fidelity.
Employees cited, as an example, that 88% of the plan’s available funds were proprietary Fidelity funds. Furthermore, 84% of plan assets were invested in these funds, which in some instances were six times more expensive than similar index funds available to Fidelity clients. Plaintiffs say Fidelity selected such funds as a way to earn more in fees, effectively “engaging in self-dealing at the expense of its own workers’ retirement savings.”
Unfortunately, the story here is not unique to Fidelity. Brokerage firm Ameriprise faces a similar lawsuit. Countless other companies, due to the high costs and/or limited choices of their own plans, may also be at risk of serious judicial scrutiny.
As far back as 1976, legal observers[2] of index funds suggested “courts may one day conclude that it is imprudent for trustees to fail to use such vehicles.”
It looks like that day may be just around the corner.
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1 Mercado, Darla. “Class grows bigger in Fidelity profit sharing lawsuit.” Investment News. September 9, 2013
2 Langbein, John H. and Richard A. Posner. “Market Funds and Trust-Investment Law” (1976). Yale Law School Faculty Scholarship Series. Paper 498.