Compliance

Fidelity Faces ERISA Lawsuit over Stable Value Fund

The suit says Fidelity was overly conservative in its underlying investments and used strategies to appease wrap providers to the detriment of 401(k) plan participants.

By Rebecca Moore editors@plansponsor.com | December 21, 2015
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A recently filed lawsuit accuses Fidelity Management Trust Company of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP), a stable value fund offered as an investment option in some 401(k) plans trusteed by Fidelity.

According to the lawsuit, during a specified class period, the MIP had such low investment returns and high fees that it was an imprudent retirement plan investment. The poor performance and high fees of the MIP were the result of the intentional actions and omissions of Fidelity as trustee of the plans, the suit alleges. Fidelity delegated day-to-day management of the MIP to its affiliate, Fidelity Management and Research Company, and the lawsuit accuses Fidelity of failing to continuously monitor and supervise its affiliate.

In a statement to PLANSPONSOR, Fidelity said, “We believe that the claims in this case are without merit and we intend to defend it vigorously.”

The compliant says that prior to 2009, Fidelity engaged in an imprudent investment strategy for the MIP that caused substantial losses to the fund and accordingly exposed itself and the MIP’s “wrap providers” to substantial losses. Faced with a substantial decline in the MIP’s market value, and with resulting pressure from the wrap providers—which were exposed to liability in the event of significant MIP fund withdrawals—Fidelity responded by adopting an unduly conservative investment strategy that was contrary to the purposes of stable value fund investing, agreeing to allow the wrap providers to charge excessive fees, and charging excessive fees for its own account.

As of October 1, 2009, the MIP held nearly $9.4 billion in assets, but as of September 30, 2014, the MIP held less than $6.3 billion in assets. This precipitous decline in assets was due largely to participant withdrawals caused in part by the consistently poor performance of the MIP, the lawsuit says. Participant withdrawals totaled $1.1 billion in 2010, $822 million in 2011, $995 million in 2012, $100 million in 2013, and $511 million in 2014.

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