Yet another 401(k) Lawsuit

by Mark Hebner and IFA Contributors - Thursday, 19 September, 2013

A few months ago, we published this article discussing lawsuits filed against financial services companies (Cigna and Ameriprise Financial) by their own employees for breaching their fiduciary duties by offering high-cost 401(k) fund options. Recently, we learned of one that might be the mother of all 401(k) lawsuits. According to InvestmentNews1, Fidelity investments is facing a class action lawsuit on behalf of its employees alleging that the firm put them into costly proprietary funds in the firm’s profit-sharing plan, even though cheaper options were available.

The plan had 55,862 participants as of 12/31/2011, with a total of $8.5 billion in assets. One of the complaints in the lawsuit is that all 170 of the fund choices are Fidelity funds, which the plaintiff’s attorney describes as “self-dealing” and “a conflict of interest.” At the end of 2010, 88% of the plan’s mutual funds were actively managed, and these funds held 84% of the plan’s assets. With so many funds, it would have been easy to consolidate them into various asset classes and obtain institutional pricing, but this was not done, according to the plaintiffs.

Excluded from the 170 fund choices was the suite of Fidelity’s target date index funds. The plaintiffs allege that it was unfair of Fidelity to include these funds in the 401(k)s it ran for other companies but not in its own 401(k) plan. Including these funds could have saved participants 83% in costs relative to the actively managed target date funds.

While we generally agree with the concept that more choices are better than fewer choices, having 170 choices is just overwhelming and ultimately not helpful. Among those 170, there are certain to be funds that have recently done very well because they happened to take a risk that incurred a high payoff. The less sophisticated participants may be tempted to throw their savings into these funds, only to be met with the disappointment that is usually associated with chasing returns.

For more information about a low-cost 401(k) plan provided by an investment fiduciary that focuses on the education of plan participants, please contact IFA’s Retirement Plan Services at 888-643-3133 or obtain a retirement plan scorecard from



1Mercado, Darla, “Class Grows Bigger in Fidelity Profit Sharing Plan Lawsuit”, InvestmentNews, 9/9/2013.