Fidelity Agrees to Settle 401(k) Lawsuits

by Mark Hebner and IFA Contributors - Thursday, 14 August, 2014

A little less than a year ago, we published this article about Fidelity facing a class action lawsuit by 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. One of the central complaints was that all 170 of the fund choices were Fidelity funds, which was deemed as “self-dealing” and “a conflict of interest”. Also, the fund choices were alleged to be biased towards more expensive actively managed funds, particularly in the target date category.

Today, we learned that Fidelity agreed to pay $12 million to settle this suit along with a similar suit that was brought earlier this year.  Fidelity admitted no wrongdoing but agreed to make a wider selection of its own funds as well as non-Fidelity funds available to enrollees. In our original article about this lawsuit, one of the structural problems that we noted with the Fidelity fund was the fact that it offered a ridiculously high 170 choices, which would simply be overwhelming for most participants, many of whom would end up selecting the funds with the best recent performance only to meet the disappointment that usually accompanies performance-chasing. To alleviate this potential problem, Fidelity also agreed to make its Portfolio Advisory Services available to plan participants at no cost. Lastly, Fidelity agreed to have the default employee contribution rate raised from 3% of salary to a more realistic 7%.

Unfortunately, Fidelity is not the only financial services company to be sued by its employees for a breach of fiduciary duty. Cigna and Prudential agreed to pay $35 million to Cigna employees who were forced to use high cost proprietary annuities and funds in their 401(k) plan. Ameriprise is currently litigating with its employees over $20 million in alleged losses resulting from high cost fund options in their retirement plan.

The ongoing story of 401(k) lawsuits is one that we have been diligently following and will continue to do so. If you believe that your retirement plan could be improved or you would like to learn more about the benefits of having IFA act as a true fiduciary for your retirement plan, please visit our Retirement Plan website, or give us a call at 888-643-3133.