Compliance May 25, 2016

Fidelity Targeted in Fee Suit Over Advice and SDBA Offerings

One accusation in the lawsuit is that Fidelity receives "kickbacks" from Financial Engines.
Reported by

Fidelity Management Trust Company and Fidelity Investments Institutional Operations Company have been sued by participants of the of the Delta Family-Care Savings Plan regarding excessive fees charged for its advice offering as well as its self-directed brokerage account (SDBA) option. 

The lawsuit is also filed on behalf of all other similarly situated plans. In a statement to PLANADVISER, Fidelity said, “The allegations in this complaint are without merit and we intend to defend against them vigorously.”

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According to the complaint, Fidelity contracted with Financial Engines Advisors, a federally registered investment adviser and wholly-owned subsidiary of Financial Engines, Inc., to provide investment advice services to individual participants in the plans that are administered by Fidelity.  Financial Engines acknowledges that it is an Employee Retirement Income Security Act (ERISA) fiduciary with respect to the investment advice program and charges a fee for its services as a percentage of the value of a participant’s account.  

The lawsuit alleges that, in order to be included as the investment advice service provider on Fidelity’s platform, Financial Engines agreed to pay—and is paying—Fidelity a significant percentage of the fees it collects from 401(k) plan investors, and these fees are not being paid for any substantial services being provided by Fidelity to Financial Engines or to participants of the plans, but are instead being paid as part of a so-called “pay-to-play” arrangement, or a kickback.  “This ‘pay-to-play’ arrangement wrongfully inflates the price of investment advice services that are critical to the successful management of workers’ retirement savings and violates the fiduciary responsibility and prohibited transaction rules of … ERISA,” the complaint says. 

In addition, the lawsuit claims that when participants in the plans invest through Fidelity’s SDBA program, BrokerageLink, and the mutual funds selected by the participants offer more than one share class, Fidelity does not always acquire the class of shares with the lowest expense ratio.  “Instead, Fidelity acquires share classes that have higher expense ratios and that will pay Fidelity significant amounts in revenue-sharing payments, effectively using the plans’ assets for its own benefit and for its own account. In doing so, Fidelity exercised its discretionary authority over retirement plan assets in a manner designed to increase its compensation at the expense of participants,” the complaint says.  

The participants also accuse Fidelity of providing incomplete, inaccurate, misleading or false information required to be included in the Annual Returns on Form 5500 for the Delta Plan and other plans with respect to the revenue sharing issues in the case.  

The lawsuit asks the U.S. District Court for the District of Massachusetts to order the defendants to make good to the plans the losses resulting from the alleged breaches, in addition to ordering them to disgorge any profits they have made as a result of their actions. 

The complaint in Fleming v. Fidelity Management Trust Company is here.

The Markets May 25, 2016

Asset Owners Looking to Use Smart Beta Solutions

The roles assumed by investment managers, consultants and index providers in the evaluation of smart beta vary depending on AUM tiers of asset owners.
Reported by

According to its third annual global institutional market survey, Smart Beta: 2016 Global Survey Findings from Asset Owners, FTSE Russell confirms that the percentage of asset owners currently evaluating smart beta has more than doubled from 15% at the first survey in 2014 to 36% in 2016, and 62% of asset owners with an existing smart beta allocation are now evaluating additional allocations.

For the purposes of the survey, “smart beta” is defined as an index-based investment strategy that is not traditionally market cap–weighted (i.e., fundamentally weighted, equal weighted, factor weighted, optimized, etc.).

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The survey finds the strongest growth in smart beta adoption is among asset owners with less than $1 billion in assets. Return enhancement and risk reduction continue to be the primary objectives for use of smart beta by asset owners; cost savings are more important in 2016 than in years past.

The percentage of asset owners using five or more smart beta indexes increased significantly, from 2% in 2014 to 21% in 2016. While low-volatility and value factor indexes still lead in asset owner implementation, adoption of multi-factor combination indexes has nearly doubled in the last year and is now a close third. And, nearly 70% of asset owners take a long view on smart beta, planning to use smart beta indexes five years or longer to help achieve investment objectives. Smart beta index-based investments are increasingly being considered as part of an active allocation, with 35% considering it an exclusively active strategy, from 22% last year.

NEXT: Vehicles for using smart beta and evaluating smart beta options

Separate accounts are the most preferred vehicle for strategic implementation of smart beta, driven by demand from asset owners with more than $1 billion in assets. For tactical implementation of smart beta, asset owners are using a wide range of vehicles, including internal management of assets, separate accounts, exchange-traded funds (ETFs) and CITs (collective investment trusts).

The roles assumed by investment managers, consultants and index providers in the evaluation of smart beta vary depending on AUM tiers of asset owners. External investment managers are most extensively engaged with asset owners under $1 billion in AUM; consultants with asset owners between $1 billion to $10 billion in AUM; and index providers with asset owners with $10 billion or more in AUM.

“The survey demonstrates accelerating interest in and implementation of smart beta indexes among global institutional asset owners,” says Rolf Agather, managing director of North America research, FTSE Russell. “While many asset owners and consultants have increased their understanding of smart beta, continuing innovations in other asset classes and the multi-factor arena underscore the need for more information and education. We hope the results of the survey provide a degree of insight for all market participants with an interest in smart beta.”

The third annual survey was conducted in January and February 2016. The 253 asset owners included this year (up from 214 last year and 181 in 2014) are drawn from North America (49%), Europe (33%) and Asia (13%). Survey results can be requested from FTSE Russell’s website.

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