First Circuit Finds Fidelity’s Collection of Infrastructure Fees Does Not Make it a Functional Fiduciary Under ERISA

In Re: Fidelity ERISA Fee Litigation, Wong v. FMR LLC, et al., No. 20-1286, __F.3d__, 2021 WL 836766 (1st Cir. Mar. 5, 2021) involves a consolidated putative class action brought by plaintiffs who are participants in 401(k) retirement plans sponsored by their respective employers. The First Circuit was tasked with deciding whether Fidelity acts as an ERISA fiduciary when it charges some mutual funds for the opportunity to be placed on the menu of investment options that Fidelity makes available to 401(k) plans for which Fidelity provides services and investment opportunities. The district court dismissed Plaintiffs’ complaint alleging that Fidelity’s exaction and retention of those fees violates its fiduciary duties owed to the plans. The First Circuit affirmed.

Fidelity has a “supermarket” called FundsNetwork which houses opportunities to invest in mutual funds established by third parties other than Fidelity. Fidelity charges some mutual funds an “infrastructure fee” to be listed as an investment opportunity in the FundsNetwork. Fidelity discloses these fees to its plan customers and their participants as “supermarket fees” paid by the mutual fund to Fidelity. Fidelity provides services to employer-established retirement plans for an agreed-upon fee. These plans select from the FundNetwork’s offerings the mutual funds that it makes available to the plan participants. There is no evidence that the supermarket fees are paid by the plans or its participants.

The court addressed Plaintiffs’ three arguments for why Fidelity should be treated as a functional fiduciary. First, Plaintiffs argued that Fidelity acted as a fiduciary by exercising control over the factors affecting the compensation it receives from the plans. The court found that the relevant contracts do not enable Fidelity to unilaterally change its investment management and administrative charges. It also found that Fidelity’s charge of fees to some funds is not an exercise of authority or control over any plan assets, management, or administration because there are a series of independent decisions negating the claim that the infrastructure fees are compensation paid by the plans to Fidelity. Fidelity negotiates the fee with the fund manager who is free to accept or reject the offer. The fund manager then decides whether to increase its fees charged to investors and those fees must be disclosed. Once in the FundsNetwork, it is up for the plan’s fiduciary investment advisors to decide whether to make the fund available to that plan’s participants. And then, it is up to the participants to decide whether to invest in the fund.

Second, Plaintiffs argued that Fidelity acted as a fiduciary in determining which mutual funds it includes and removes from its FundsNetwork. The court noted that the Third and Seventh Circuits have rejected this argument. “ERISA does not treat as a fiduciary one who offers without advice numerous investment options from which an investment advisor might select investments. To rule otherwise would be to deprive plan fiduciaries of the benefit of having vendors who need not themselves bear the expense of duplicating the investment advisor’s fiduciary role.” Fidelity has no control over which funds are made available to a plan’s participants and Fidelity cannot take actions that affect a participant’s existing investment in an option. Here, there is no allegation that Fidelity’s decision to stop offering a fund from its FundsNetwork removes that fund from those already selected by a plan.

Lastly, Plaintiffs argued that Fidelity can successfully impose the infrastructure fees because it has lots of plan assets to be invested. Further, it acts as a directed trustee related to its collection of these fees because the funds pay those fees to gain access to the pooled participants’ investments. The court found that Fidelity’s responsibilities as a directed trustee do not extend to its charging of an infrastructure fee. It can charge funds because it has lots of customers, not because it controls its customers’ decision-making or their assets in any meaningful manner.