PLANSPONSOR - April/May 2019 - 76

INSIDE ANGLE
Infrastructure Fees
Three lawsuits will impact the industry
I
n the plaintiffs' bar's apparently never-ending onslaught
against the retirement industry, plaintiffs have recently concocted
new claims and filed new complaints relating to the
compensation received by plan service providers. Most recently,
plaintiffs have turned their attention to so-called infrastructure
fees that recordkeepers receive from mutual fund companies in
exchange for making their funds available on their recordkeeping
platform. This new development and focus by the plaintiffs'
bar has a plethora of implications for plans and their service providers,
as described below.
As of today, three proposed class action lawsuits have
been filed against Fidelity alleging that its fee practices constituted
fiduciary breaches and prohibited transactions under the
Employee Retirement Income Security Act (ERISA): Wong v.
FMR LLC, et al., Bailis v. FMR LLC, et al., and Summers v. FMR
LLC, et al.
The factual allegations and legal claims are generally similar
in the three suits. In particular, all three allege that Fidelity
engaged in a " pay to play " scheme and received fees from mutual
fund companies as a condition of being included on its platform.
Although the litigation is only in its infancy, the claims
raised in these lawsuits carry important implications for the
retirement community at large. In particular, the suits examine
two significant and potentially dispositive questions.
The first question relates to whether Fidelity acts as a fiduciary
under ERISA with respect to the assessment and collection
of the infrastructure fee. We think that the answer to this question
is no. Nevertheless, this is a critical issue because investment
menu and platform design functions are generally considered
nonfiduciary under ERISA. To bypass this principle, the
lawsuits allege novel theories, including that Fidelity allegedly
has authority and control over the amount of its compensation
when negotiating the amounts of these mutual fund payments.
The lawsuits also allege that Fidelity was a fiduciary due
to its practice of pooling client investments before collectively
investing them in so-called omnibus accounts. The complaints
allege that Fidelity maintains a single omnibus account to
process trades and maintain positions that are, in turn, divided
into accumulation units that replicate the performance of the
mutual fund and reflect the interests held by the plans. Both
the omnibus accounts and the accumulation units are held by
Fidelity. The complaints allege that Fidelity is a fiduciary based
76 PLANSPONSOR.com April - May 2019
Art by Joseph Ciardiello
on its discretion and control over the omnibus accounts and
accumulation units, both of which the complaints further allege
constitute plan assets. It is unclear whether courts will be receptive
to this set of claims.
The second question relates to Fidelity's fee disclosures.
Here, the complaints allege that Fidelity breached its fiduciary
duty to its plan customers and committed prohibited transactions
within the meaning of ERISA Sections 406(a) and 406(b)
by setting and retaining the infrastructure fees and by failing to
disclose the existence of the infrastructure payments within its
documents or its 408(b)(2) disclosures to plan sponsors.
In this respect, despite any uncertainty about the company's
fiduciary status, Fidelity, as a recordkeeper to ERISA plans,
was very likely a covered service provider within the meaning
of the Department of Labor (DOL)'s fee disclosure rules. In
this regard, ERISA Section 408(b)(2) regulations require that
service providers disclose all direct and indirect compensation
they receive in connection with their services to plans. Thus, the
key question is whether the infrastructure fees were received " in
connection " with Fidelity's recordkeeping services. If such fees
are considered in connection with recordkeeping services and
Fidelity failed to disclose them, then it is possible that its 408(b)(2)
disclosures are, arguably, deficient.
Whether these lawsuits are successful is largely irrelevant
at this point as they have already placed public scrutiny on
practices that were previously not fully understood by many
in the retirement industry. We expect that the attention on
mutual fund platform fees is likely to continue to be a source
of anxiety for many in the retirement space. Recordkeepers and
other service providers will likely review their arrangements
and analyze whether other indirect compensation should be
disclosed to plan fiduciaries.
Current events also illuminate a plan fiduciary's obligation
to ensure that the 408(b)(2) disclosures that are received from
service providers are true and correct. In this respect, these
lawsuits could place greater emphasis on a sponsor's responsibility
to ensure that such disclosures are accurate and to be
cognizant of the full amount of service provider compensation.
Stephen Saxon is a partner with Groom Law Group,
Chartered, and George Sepsakos is a principal with Groom,
Offices for Groom are in Washington, D.C.
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