I have always been concerned about the use of proprietary funds, especially belong to mutual fund companies and their use in their own 401(k) plans because they’re ripe to be a target for a class action lawsuit.
Fidelity should know since they’re being sued again after shelling $12 million as part of a 2014 case settlement.
In the current case, Moitoso et al v. FMR LLC et al, Plaintiffs claim that Fidelity breached its fiduciary duty by loading its $15 billion 401(k) plan with proprietary mutual funds, causing the firm and several affiliated entities to benefit financially. They claim Fidelity’s conduct is “particularly inexcusable” because of the prior lawsuit (Bilewicz v. FMR LLC ) and being one of the largest 401(k) record-keepers.
The problem with Fidelity and other fund companies is that when you’re in the business of selling mutual funds, it looks bad for business if you don’t offer your funds in your 401(k) plan. It would be like working in a restaurant and ordering out. If Fidelity predominately carried Vanguard funds in their 401(k) plan, imagine what other mutual fund companies and other plan providers would use for that information.
The biggest problem for Fidelity is that in 2016, they had 234 proprietary mutual funds in its plan and zero non-proprietary funds. 234 funds? In my mind, that’s 222 funds that many because studies show that too many funds in a 401(k) lineup depress deferral percentages in the plan. Only using their own proprietary funds doesn’t look good for Fidelity, but plaintiffs will have to show that it’s a breach of fiduciary duty when Fidelity will make that motion for summary judgment and if the plaintiffs survive a summary judgment motion, then Fidelity will settle again. I think settlements by fund companies who persist again to using only their proprietary funds are probably seen as the cost of doing business.