Experiential Wealth

Wong, et al vs. Fidelity – Finding New Ways to Get Revenue

Mar 3, 2019 | Institutions, Regulations

In its thirst to maintain and grow assets under administration in an increasingly competitive and dwindling fee environment, a recordkeeper must find a balance between the services it offers and the overall (direct and indirect) revenue generated in support of such services.  A service provider’s business and strategic decisions in expanding its reach and maximizing its revenue for the benefit of its shareholders are natural and reasonable.  On the other hand, a service provider to a benefit plan subject to ERISA is deemed a party-in-interest and thus is subject to prohibitive transaction rules to prevent harm derived from self-dealing and conflict-of-interests.

Recordkeepers have traditionally avoided being considered ERISA administration fiduciaries when providing recordkeeping services and fulfilling other administerial duties.  It is up to the court to decide if Fidelity is deemed an ERISA fiduciary (facts and circumstance tests) in this case.  The standard would be significantly higher if Fidelity is considered an ERISA fiduciary by the court and the claims of this case would be viewed under the ERISA fiduciary standard lens.

Although Fidelity is called out specifically in this class action regarding its disclosure and potential conflicts pertaining to its practices involving the operation of its proprietary mutual fund platform – the “Funds Network”, the potential industry implication is wide and deep.  Today, all recordkeepers and custodians are subject to the same growth and revenue pressures to maintain service competitiveness and survival; favorable court findings in support of the Plaintiffs could affect the “open architecture” approach altogether.   The biggest negative impact may be felt by plan participants as the investment selection universe would likely shrink as recordkeepers have no obligation nor incentives to offer every mutual fund under the Sun.

Click here to read our full commentary on the case.