Fidelity’s Recent Case Win Highlights the Need for Fiduciary Oversight of Plan Vendors

Fidelity recently won a dismissal from a lawsuit brought by participants in the Delta Family-Care Savings Plan regarding the Plan’s managed account provider, Financial Engines, and its self-directed brokerage program. The lawsuit was an excessive fee lawsuit centering on:

• revenue Fidelity received from Financial Engines for being on Fidelity’s platform, which created a breach of fiduciary duty by Fidelity (according to the plaintiffs)
• breach of the duty of loyalty by Fidelity for exercising discretionary authority and not selecting the least expensive share class available in the self-directed brokerage account

Regarding the first claim that Fidelity breached its fiduciary duty to the Plan by receiving such excessive compensation, the court found that the plaintiffs failed to state a claim. In siding with Fidelity on the motion to dismiss, the presiding judge found that Fidelity, as a service provider to the Plan, was not acting in a fiduciary capacity. The judge’s decision is consistent with case law that regularly finds service providers are not fiduciaries under ERISA (as it relates to this specific issue).

In dismissing the lawsuit, the judge found that the named fiduciary in this case was the Delta retirement plan committee (who wasn’t a party to the lawsuit).  The Delta retirement plan committee appointed Financial Engines as an investment manager to the Plan and, therefore, it had the responsibility to prudently select and monitor them. Similarly, the self-directed brokerage account was an investment option selected by the Delta retirement plan committee and they had the responsibility with respect to that decision.

The judge’s decision doesn’t create any new fiduciary responsibilities, but it does highlight an area of fiduciary oversight that I believe many plan fiduciaries overlook. Most recordkeeping vendors offer a single managed account solution and a single self-directed brokerage account solution. In my experience, plan sponsors elect to offer both options to provide choices for their plan participants. But, because only a single solution is frequently available with any recordkeeper, the plan fiduciaries do not complete the full level of due diligence and monitoring that they should; the type of due diligence they regularly complete in selecting a recordkeeper or an investment option.

As plan fiduciaries, it is important to remember that these are services requiring a fiduciary process for selecting and monitoring the service provider. You don’t get a free pass because your vendor only offers one choice or because your participants get to decide whether they want to use the service.

If you need help in reviewing your service providers and the ancillary services they provide, feel free to contact a Multnomah Group consultant.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.