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DOL Probes Fidelity Over "Obscure" Fees on Mutual Funds

February 27, 2019

Fidelity Investments is under investigation by the Department of Labor over fees it charges some mutual fund providers, according to news reports.

The probe targets an “obscure and confidential fee,” the Wall Street Journal writes, citing a person familiar with the investigation. The annual charge, which Fidelity calls an “infrastructure fee,” was implemented in 2016 and was “designed to ensure that each Fund Firm meets a minimum required payment to Fidelity,” according to a 2017 internal Fidelity document reviewed by the paper.

The fee is calculated as 0.15% of a fund company’s assets industrywide rather than the assets only on Fidelity’s platform held by its customers, the Journal writes. And because the fee is charged as an infrastructure fee, the fund providers can avoid having to disclose it to investors, according to the paper.

Fidelity justified the fee in the document reviewed by the Journal by saying that it helps the company deal with “unsustainable economics” caused by the rising popularity of low-cost mutual funds. And Fidelity offers thousands of third-party mutual funds to its clients, a Fidelity spokesman tells the paper.

“We receive a fee from some of those mutual-fund companies to compensate us for maintaining the infrastructure that is needed to make those funds available,” the Fidelity spokesman tells the Journal, pointing to “systems and processes for record-keeping, trading and settlement, making available regulatory and other communications, and providing customer support online and through phone representatives. It is costly to maintain this kind of infrastructure and Fidelity is entitled to be compensated for those costs.”

The company declined comment to the the paper about the government investigation. A DOL spokesman tells the Journal that the agency can neither confirm nor deny the investigation.

Fidelity Investments is also facing a lawsuit from a 401(k) plan participant accusing the asset manager of pocketing tens of millions of dollars each year in undisclosed kickbacks, InvestmentNews writes. The suit targets the same fees under the DOL’s probe, according to the Journal.

Andre Wong, a participant in T-Mobile USA Inc.’s 401(k) plan who filed the suit last week in Massachusetts district court, alleges the fees amounted to “kickback” payments, InvestmentNews writes. And the firm doesn’t disclose these kickbacks to its clients, who in turn pay higher fees for mutual funds, according to the suit cited by the publication.

A spokesman for the firm tells the InvestmentNews that Fidelity complies with all disclosure requirements in regard to fees and denies the suit’s allegations.

Fidelity has landed in hot water over its management of retirement plans before. In October, the company was sued for allegedly stuffing its own 401(k) plan with proprietary mutual funds and causing plan participants over $100 million in annual losses compared to an average 401(k) plan.

And in 2014, Fidelity settled a similar suit for $12 million.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.