Administration May 13, 2024

Fidelity Investments Reorganizes Rutland Square Trust II

Fidelity is seeking agreement from shareholders to reorganize funds offered through Fidelity Personal & Workplace Advisors LLC by RIA Strategic Advisers LLC funds.

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Updated with new information

Fidelity Investments is planning to reorganize a trust of investment funds provided to clients for retirement-managed accounts offered through Fidelity Personal & Workplace Advisors, the firm disclosed in a securities filing Friday.

Fidelity plans to transfer all assets of the $59.846 million Strategic Advisers Large Cap Fund and all assets of the $9.430 million Strategic Advisers Small-Mid Cap Fund to the Strategic Advisers U.S. Total Stock Fund—pending shareholder agreement with reorganization proposals. The Strategic Advisers U.S. Total Stock Fund is a new fund and does not have assets. 

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Fidelity-owned investment adviser and asset allocator Strategic Advisers LLC on May 6 separately filed a prospectus with the SEC for the U.S. Total Stock Fund to trade under the ticker (FSAKX).

The fund reorganizations are necessary for “providing opportunities for improved investment outcomes from reducing redundant risk mitigation strategies and reducing the need to trade across funds and potentially realize gains for customers in taxable accounts,” notes Fidelity in the SEC filing.  

Each fund’s board of directors has reviewed the proposal and approved the reorganization, noting it will not result in a dilution of the interests of the shareholders of either fund. The consolidation under the total stock fund benefits Fidelity by lowering the number of funds the firm is managing, according to Fidelity’s securities filing.

The reorganizations will affect investment funds in the Fidelity Rutland Square Trust II. The trust holds 15 Strategic Advisers’ funds, says Fidelity, by email.  

The reorganized U.S. Total Stock Fund—inclusive of the new share class—is expected to have a total expense ratio that is the same as Large Cap Fund, according to the filing.  

Strategic Advisers has contractually agreed to lower management fees on of the Large Cap Fund and Small-Mid Cap Fund in an amount equal to 0.25% of the fund’s average daily net assets through September 30, 2026, and for the U.S. Total Stock Fund through September 30, 2027, the regulatory filing shows.

“Shareholders are expected to benefit from a projected decrease of 1 bp in total expenses when comparing the projected total annual operating expenses of U.S. Total Stock Fund to the weighted average expense ratio of both target funds,” says the filing.

There is no minimum balance or purchase minimum for fund shares.

If the proposed reorganizations are not approved, the funds will maintain their current expense structures.

The proposals will be presented to shareholders at a special meeting on July 9 at 8:00 am. Each shareholder of U.S. Total Stock Fund is entitled to one vote for each dollar of net asset value of the fund that shareholder owns, with fractional dollar amounts entitled to a proportionate fractional vote, according to the filing.

The fund reorganizations are not a taxable event.

Strategic Advisers, a registered investment adviser, manages nearly $908 billion in assets under management. Strategic Advisers Funds are mutual funds, offered exclusively to clients enrolled in Fidelity Wealth Services.

Fidelity Investments provides discretionary investment management for a range of managed accounts offered through Fidelity Personal & Workplace Advisors LLC.

Investing in a managed account service aims to benefit participants with personalized savings and investment recommendations from an independent registered investment adviser. Managed accounts are an alternative arrangement of retirement planning and investing to target-date funds inside 401(k) plans, seeking greater returns with investment strategies personalized to individuals.

Strategic Advisers LLC investments in Fidelity retirement-managed accounts are restricted to offerings from the adviser or their affiliates. Shares are available only to certain discretionary investment programs offered by the adviser or its affiliates.

Representatives of Fidelity declined comment on the reorganization, referring questions to its securities filing.

Compliance May 13, 2024

Industry Groups Request SCOTUS Hearing for AT&T ERISA Case

A seven-year-old lawsuit concerning fee disclosure could be before the Supreme Court next term.

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The ERISA Industry Committee, the American Benefits Council, the SPARK Institute, and the Committee of Investment of Employee Benefit Assets filed an amicus brief with the Supreme Court on May 9 asking the high court to hear an appeal on behalf of AT&T in the case Bugielski et al. v. AT&T.

AT&T was initially sued in 2017 for a breach of fiduciary duty when it amended contracts to add brokerage and investment advisory services offered by Fidelity Investments for their participants in 2012 and 2014, respectively. The plaintiffs alleged that AT&T did not evaluate or disclose the compensation paid to Fidelity when it added these services. The complaint added that the fees were a prohibited transaction, did not comply with the terms of any exemption and that the plan sponsor had not followed a prudent process.

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The district court initially ruled in favor of AT&T and said the compensation Fidelity received was third-party compensation and the plan itself was not a party, and therefore, AT&T was not required to evaluate and disclose it.

The U.S. Ninth Circuit Court of Appeals disagreed and remanded the case back to the district court for further proceedings in October 2022. The appeals court ruled that amending the contracts had been prohibited transactions because they added optional advisory and brokerage services to the plan paid by participant fees. The appeals court ordered the district court to start with that assumption and then decide if an exemption applies to the transactions.

ERIC and the other retirement and benefits groups argue that the 9th Circuit’s ruling would make any contract modification or renegotiation presumptively prohibited, which in turn would result in a “flood of litigation” against plan sponsors that would not be subject to a motion to dismiss. They argue that Congress did not intend routine contract renewals to be prohibited transactions under the Employee Retirement Income Security Act.

The appellants added that such an increase in litigation would increase already staggering insurance costs on the part of plan sponsors.

Tom Christina, executive director of the ERIC Legal Center, said in a statement that “Under the Ninth Circuit’s interpretation of Section 406 of ERISA, a plaintiff could sue a plan fiduciary for the routine renewal of its contract with its recordkeeper.” He added, “Based on the Ninth Circuit’s decision, a complaint alleging nothing more than that would survive a motion to dismiss and become an expensive burden for the employer.”

ERIC’s brief added that the Supreme Court, by taking this case, could help resolve a complicated split on these issues among several courts of appeals.

If the Supreme Court decides to hear the case, it would likely be heard in the 2025 term and ruled upon by June 2025.

 

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