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DOL probing Fidelity

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According to an article in the Wall Street Journal, the Department of Labor (DOL), is looking at an obscure and confidential “infrastructure” fee that Fidelity charges the mutual fund companies for putting their funds on its sales platform, called FundsNetwork.

Citing an internal Fidelity document, the Journal’s Gretchen Morgenson reports: “The fee, which appears to have been implemented in 2016, is ‘designed to ensure that each Fund Firm meets a minimum required payment to Fidelity.’ ” By marking the charge as an infrastructure fee, the fund firms may be able to avoid disclosing it to investors.”Fund companies that decline to pay the amount will ‘be subject to a very limited relationship’ with the company, the document says. Funds can either pay the fee themselves or push the cost onto investors in the mutual fund. This can increase the overall fees of a fund, causing individual investors to pay more and dent returns.”

The infrastructure fee appears to be a way for Fidelity to make up for revenue the firm has lost as a result of investors flocking to index mutual funds, a situation that Fidelity claims in their document that has ‘unsustainable economics.’ ”

“Fidelity also stated in the document that its traditional business model is ‘broken’ and characterized the infrastructure fee as a solution to that problem.”

The fee popped up in 2016 or 2017 as a convenient way for Fidelity to deal with the new reality of a move of 401(k) plans to index funds and the ending of the practice of revenue sharing payments from mutual funds to Fidelity. Having the DOL breath down your back isn’t fun, my clients will attest to that. The issue is whether the fee was being disclosed and if so, how? If the Fidelity documents are to believed, there might be a lack of transparency and I would expect the DOL to pound on that through fines. The jury is still out and we’ll find out if the DOL finds fault with Fidelity’s fee

 

 

 

 

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