Judge Dismisses ERISA Suit Against Fidelity Stable Value Decisions

The suit accused the firm of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP). 

By John Manganaro | June 22, 2017
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A judge in the U.S. District Court for the District of Massachusetts this week dismissed an Employee Retirement Income Security Act (ERISA) lawsuit filed against Fidelity Management Trust Company over the management and monitoring of a stable value fund offered to 401(k) plans.

The suit, Ellis vs. Fidelity Management Trust Co., accused Fidelity 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 for which Fidelity was trustee.

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 weak 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 alleged. Fidelity delegated day-to-day management of the MIP to its affiliate, Fidelity Management and Research Company, and the lawsuit accused Fidelity of failing to continuously monitor and supervise its affiliate. Among other issues, plaintiffs claimed this lack of prudence and monitoring resulted in the stable value fund purchasing excessive wrap insurance that unnecessarily dampened return prospects and resulted in conflicts of interest.

In a statement to PLANADVISER, Fidelity said it intended to defend itself vigorously against the claims, which it has now done successfully. Technically speaking the suit has been dismissed on summary judgement, due to the fact that “the plaintiffs have failed to establish a breach of either duty of loyalty or the duty of prudence.”

The text of the court’s decision goes into significant detail about the investment and monitoring process Fidelity used in managing the stable value fund in question. The plaintiffs had argued that Fidelity acted in its own self-interest by agreeing to overly stringent wrap insurance guidelines that sacrificed the competitiveness of the portfolio, while allowing Fidelity to grow its assets under management. Specifically, the plaintiffs alleged that Fidelity had a financial incentive to “increase its stable value AUM and to amass wrap capacity to improve its competitive position and increase its management fees, and that Fidelity pursued these aims rather than acting in the plaintiffs’ best interests.”

Fidelity responded that the plaintiffs do not in fact present evidence that Fidelity put its interests ahead of the portfolio’s, and thus cannot establish a breach of the duty of loyalty. Fidelity further argued that because the plaintiffs have not disputed that stable value funds need wrap coverage or that Fidelity was facing the potential withdrawal of several of the portfolio’s wrap providers in 2009, to prove a breach of the duty of loyalty, the plaintiffs need to show that the portfolio did not need additional wrap coverage and that the new wrap guidelines to which Fidelity agreed were overly conservative.”

This argument proved persuasive for the Massachusetts district court: “Because the plaintiffs fail to carry their burden of proof, this court grants summary judgment on the issue of whether Fidelity breached the duty of loyalty.”

 NEXT: More from the text of the judgment