Use of Fidelity Active Management Funds Questioned in Court

Last week, a participant in Costco’s retirement plan filed a lawsuit claiming the fiduciaries of the plan breached their duties under the Employee Retirement Income Security Act (ERISA) by authorizing the plan to provide inappropriately expensive and underperforming active management funds.

Similar allegations are echoed in three new lawsuits filed this week against Quest Diagnostics, IQVIA Holdings and Eversource. All three suits question the use of actively management funds provided by Fidelity, although the asset manager is not itself named as a defendant in any of the complaints.

In the Quest Diagnostics complaint, participants allege the plan has nearly $4 billion in assets and some 56,000 participants, placing it in the top 0.1% of all 401(k) plans

“The marketplace for 401(k) retirement plan services is well-established and can be competitive when fiduciaries of defined contribution [DC] retirement plans act in an informed and prudent fashion,” the lawsuit states. “Multibillion dollar defined contribution plans, like the [Quest plan], have significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for the administration of 401(k) plans and the investment of 401(k) assets.”

The suit suggests the Quest plan fiduciaries breached their duties under ERISA by failing to fully disclose to participants the expenses and risk of the plan’s investment options and by selecting and retaining high-cost and poor performing investments instead of offering other readily available, easily identifiable and more prudent alternative investments. They are also accused of breaching their fiduciary duties under ERISA by allowing unreasonable expenses to be charged to participants for administration of the plan.

According to the plaintiffs, among other investments, the Quest plan lineup offers a suite of 13 target-date funds (TDFs).

“The underlying mutual funds that target-date fund managers choose to represent each asset class can be actively or passively managed,” the complaint states. “Since at least December 2010, the plan has offered the Fidelity Freedom fund target-date suite. … Among its several target-date offerings, Fidelity’s two most popular are the Freedom funds (the active suite) and the substantially less costly Freedom Index funds (the index suite). Defendants were responsible for crafting the plan lineup and could have chosen any of the target-date families offered by Fidelity, or those of any other target-date provider.  Defendants failed to compare the active and index suites and consider their respective merits and features. … Defendants failed to act in the sole interest of plan participants, and breached their fiduciary duties by imprudently selecting and retaining the active suite.”

Quest Diagnostics has not yet responded to a request for comment about the lawsuit, nor has IQVIA. Eversource provided the following statement: “We recently learned of the class-action lawsuit filed in federal court in Connecticut. We are reviewing the lawsuit, but we believe it has no merit and will fight it vigorously.”

The latter two companies face essentially the same legal questions, and, notably, Fidelity is the recordkeeper for all three plans.