Fiduciary Failures Affirmed in Fidelity Self-Dealing Challenge

The U.S. District Court for the District of Massachusetts has ruled in an Employee Retirement Income Security Act (ERISA) lawsuit filed against various business units of Fidelity and alleging impermissible self-dealing and imprudence.

The complex decision rules in part for and against the fiduciary defendants and does not resolve some of the important matters at hand. As the decision explains, there “remains a live issue as to whether Fidelity’s statute of limitations defense is viable.” As such, the ruling focuses on answering important threshold questions as to whether Fidelity’s actions in the operations of its retirement plan violated ERISA—thereby establishing liability but not causation or loss.

In the underlying lawsuit, the certified class of plaintiffs alleges that the Fidelity defendants breached their ERISA fiduciary duties of prudence and loyalty by permitting self-dealing to occur in the retirement plan offered to Fidelity’s own employees. According to the complaint, the defendants “loaded the plan exclusively with Fidelity-affiliated investments, without investigating whether plan participants would have been better served by investments managed by unaffiliated companies.”

The lawsuit says that, among some 20 peer defined contribution (DC) plans with more than $5 billion in assets for which necessary data is available, Fidelity’s plan performed the worst—almost three times worse than average. According to the plaintiffs, this underperformance represents more than $100 million per year in losses compared with the average plan.

For its part, Fidelity asserts as an affirmative defense that all of the plaintiffs’ charges are not only barred by a prior court-approved class action settlement but are also time-barred. Additionally, Fidelity argues that it has not violated any fiduciary duties as matter of law, and that any underperformance experienced by the plan is not the result of imprudence or disloyalty.

A Mixed Ruling

Having heard the arguments of both sides, the court ruled that, on count one, Fidelity has breached its duty of prudence by failing to monitor its mutual fund investments and by failing to monitor/control recordkeeping expenses. Fidelity, however, has not breached its duty of prudence by failing to investigate alternatives to those mutual funds because a prudent fiduciary would not be required to conduct those specific investigations.

“Fidelity additionally has not breached its duty of loyalty,” the ruling states. “On count three, Fidelity has not engaged in prohibited transactions because its dealings with proprietary products were no less favorable to the plan as a whole than to other shareholders of Fidelity funds. Counts four and five are both derivative of counts one and three.”

Regarding count four, the ruling states that one defendant (FMR LLC) is liable for the breach of its duty to monitor the plan fiduciaries “with regards to their ongoing handling of the mutual fund investments and recordkeeping expenses.” On count five, the decisions rules that plaintiffs “may recover from Fidelity entities for any profits traceable to the aforementioned breach of the fiduciary duty to monitor.”

“At trial, the plaintiffs will bear the burden of proving the extent of any losses, and Fidelity will bear the burden of proving that any losses to the plan were not caused by the lack of monitoring,” the ruling concludes. The ruling goes on to state that there “remains a live issue” as to whether Fidelity’s statute of limitations defense is viable.

“Additionally, this decision addresses only the question of liability, not causation or loss,” the ruling emphasizes.

A ‘Case Stated’ Ruling

As a “case stated” ruling, the structure of this new decision deserves its own short analysis. Indeed, the decision takes time to spell out its unique structure and to clarify what are essentially partial determinations.

“While the summary judgment motions were sub judice [under a judge], the parties proposed that the court resolve some—but not all—of the issues as a ‘case stated,’” the ruling explains. “Case stated hearings provide an efficacious procedural alternative to cross motions for summary judgment.”

In a case stated decision, the parties waive trial and present the case to the court on the undisputed facts in the pre-trial record. The court is then entitled to engage in a certain amount of fact finding, “including the drawing of inferences.”