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Compliance October 2, 2017
Fidelity Wins Dismissal of Suit Over Advice and SDBAs
The court basically decided Fidelity was not the fiduciary responsible for choosing to provide the advice and SDBA offerings to participants.
Reported by Rebecca Moore
U.S. District Judge Allison D. Burroughs of the U.S. District Court for the District of Massachusetts has granted to Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company a motion to dismiss a lawsuit for failure to state a claim.
The defendants were sued by participants of the of the Delta Family-Care Savings Plan regarding excessive fees charged for the plan’s advice offering as well as its self-directed brokerage account (SDBA) option.
The court basically decided that Delta is the fiduciary responsible for choosing to provide the advice and SDBA offerings to participants, not Fidelity.
The lawsuit alleges that, in order to be included as the investment advice service provider on Fidelity’s platform, Financial Engines agreed to pay—and is paying—Fidelity a significant percentage of the fees it collects from 401(k) plan investors, and these fees are not being paid for any substantial services being provided by Fidelity to Financial Engines or to participants of the plans. In addition, the lawsuit claims that when participants in the plans invest through Fidelity’s SDBA program, BrokerageLink, and the mutual funds selected by the participants offer more than one share class, Fidelity does not always acquire the class of shares with the lowest expense ratio.
The defendants moved to dismiss a claim regarding the SDBA for lack of subject matter jurisdiction, which the court denied. Fidelity argued that by selecting a ticker symbol for the vehicle in which to invest, the plaintiff who alleged injury was responsible for selecting the share class of the vehicle in which to invest. The plaintiffs in the case acknowledge that investors do indeed “choose” the share class, even if only in a “purely mechanical sense,” but argue that the defendants remain liable under the Employee Retirement Income Security Act (ERISA) because BrokerageLink does not always offer investors “a meaningful choice of share class, such that the investor is free to choose the lowest cost share class for which that investor may be qualified.” Burroughs said, “Thus, this is not a case in which ‘no colorable hook exists upon which subject matter jurisdiction can be hung.’”
NEXT: Dismissal for Failure to State a ClaimRegarding Fidelity’s motion to dismiss for failure to state a claim, Burroughs said first, the court must “distinguish the complaint’s factual allegations (which must be accepted as true) from its conclusory legal allegations (which need not be credited).” Second, it “must determine whether the factual allegations are sufficient to support the reasonable inference that the defendant is liable.”
According to the court opinion, the plaintiffs’ current theory of BrokerageLink liability seems to be that the defendants breached their fiduciary duty to the plan by “selecting” only higher-cost share classes to be available through BrokerageLink, while leaving out lower-cost share classes, and thereby maximizing their revenue-sharing payments at the expense of plan participants.
Burroughs found that according to Schedule C of the Master Trust Agreement, the Delta committee, as named fiduciary, “direct[ed]” the defendants that individual accounts could be invested in a list of 28 funds or products, one of which was BrokerageLink. She said this language makes plain that the Delta entities, not the defendants, retained control over whether BrokerageLink—and by extension the classes of mutual fund shares offered through it—was made available to plan participants. “There is no suggestion in the complaint that Delta lacked the authority or ability to leave BrokerageLink off of Schedule C if it determined that the share classes offered through BrokerageLink were unsuitable for plan participants,” Burroughs wrote in her opinion. “Accordingly, defendants did not exercise the type of authority or control over the decision to include BrokerageLink in the plan that would give rise to ERISA liability.”
Burroughs said allegations relating to the use of investment advisor Financial Engines runs into similar difficulties. The plaintiffs claim that the defendants acted in a fiduciary capacity by hiring Financial Engines and controlling the negotiation of the terms and conditions under which Financial Engines would provide its services to plan participants and by selecting Financial Engines as an investment advice provider for plan participants.
“This theory is premised on the notion that defendants, rather than Delta, hired or selected Financial Engines as an investment advice provider for plan participants,” Burroughs wrote, “but the Master Trust Agreement contradicts this premise.” She found that the agreement states that the “Named Fiduciary” (the Delta Air Lines, Inc., Benefit Funds Investment Committee) “may also appoint an investment manager” and “has so appointed Financial Engines with respect to assets held in the individual Plan accounts of Participants enrolled in Professional Management.” It also states that the “Trustee” (FMTC) “shall have no responsibility” for the decision to offer such a service.
Burroughs also noted that courts have held that plan service providers are not acting in a fiduciary capacity when they negotiate with plan sponsors for their own compensation, so long as the final agreement with the plan does not give the service provider the ability to determine or control the actual amount of its compensation. The critical inquiry is who controls the “decision whether or not, and on what terms, to enter into an agreement” with a service provider. Absent authority or control over that decision, a service provider “is not an ERISA fiduciary with respect to the terms of the agreement for his compensation.” She added that the complaint does not allege that, once Financial Engines was hired, the defendants retained any authority or control over the rate of compensation it would receive from Financial Engines.
“To the contrary, the complaint and the incorporated Master Trust Agreement indicate that defendants’ fee-sharing agreements pre-dated their involvement with the plan,” Burroughs wrote.
She allowed the defendants’ motion to dismiss for failure to state a claim.