A new claim against Fidelity Management Trust Company allegesfiduciaries imprudently mismanaged a stable value fund, resultingin more than $3 billion in depreciation to the fund between 2009and 2014, causing losses to 401(k) participants’ retirementsavings.

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"We believe that the claims in this case are without merit andwe intend to defend it vigorously,” said a Fidelity spokesperson ina statement.

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Much of that depreciation resulted as participants pulled assetsfrom the Fidelity Group Employee Benefit Plan Managed IncomePortfolio Commingled Pool, or MIP, in the face of consistently poorreturns, according to court documents.

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The suit alleges Fidelity managers took an overly aggressiveinvestment strategy relative to a typical stable value fund priorto the financial crisis, resulting in a market loss of about $381million by the end of fiscal year 2008.

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The effective return on the MIP fund was zero that year, whilethe benchmark for stable value funds returned about 8percent in spite of the financial crisis.

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In 2006, nearly 60 percent of the fund was invested inasset-backed securities, mortgage-backed securities andcollateralized debt obligations.

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That strategy flew in the face of conventional wisdom, allegesthe claim.

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Stable value funds, which are included in almost two-thirds ofall defined contribution plans, aredesigned to preserve participants’ capital while providing steadyreturns, typically by investing in a high-quality fixed incomeportfolio with an intermediate duration. They are designed as asafe option for participants to counter more volatile equityfunds.

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Fidelity trustees shifted the MIP fund’s aggressive investmentstrategy to an “excessively conservative direction” by 2011, whenalmost 44 percent of the fund was invested in low-yielding U.S.Treasuries.

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At that time the average stable value fund allocated only 22percent of assets to Treasuries, according to the Stable ValueInvestment Association.

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The shift to a conservative strategy amounted to a “gratuitousbenefit” to the MIP fund’s so-called “wrap” providers, whichprovide investments to protect the principal in stable valuefunds.

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The conservative investment strategy reduced the risk that thewrap providers would have to pay guarantees to the MIP fund. AIG,J.P. Morgan Chase Bank and State Street Bank were among theproviders.

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Fidelity also agreed to raise fees paid to the wrap providers,from eight basis points to 22 basis points between 2009 and 2011,further reducing investors’ returns.

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“Effectively, Fidelity paid for the problems that itsmismanagement created with the Wrap Providers by bailing out theWrap Providers with plan participants’ money,” says thecomplaint.

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The suit also alleges Fidelity misled participants by using amoney-market benchmark to gauge the fund’s performance, a violationof disclosure requirements under the Employee Retirement IncomeSecurity Act, the suit claims

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Between 2010 and 2013, the MIP fund returned less than theinflation rate, and underperformed stable-value fundbenchmarks.

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As the MIP fund underperformed its peers, it chargedparticipants excessively high fees, the complaintalleges.

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The 2012 expense ratio for the fund was 69 basis points, whilestable value funds averaged 41 basis points.

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The two named plaintiffs are Barnes and Noble employees thatfirst invested in the MIP fund in 2009. The case, Ellis et alv. Fidelity Management Trust Co., was filed in the U.S.District Court for the District of Massachusetts.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.