A new claim against Fidelity Management Trust Company alleges fiduciaries imprudently mismanaged a stable value fund, resulting in more than $3 billion in depreciation to the fund between 2009 and 2014, causing losses to 401(k) participants’ retirement savings.
"We believe that the claims in this case are without merit and we intend to defend it vigorously,” said a Fidelity spokesperson in a statement.
Much of that depreciation resulted as participants pulled assets from the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool, or MIP, in the face of consistently poor returns, according to court documents.
The suit alleges Fidelity managers took an overly aggressive investment strategy relative to a typical stable value fund prior to the financial crisis, resulting in a market loss of about $381 million by the end of fiscal year 2008.
The effective return on the MIP fund was zero that year, while the benchmark for stable value funds returned about 8 percent in spite of the financial crisis.
In 2006, nearly 60 percent of the fund was invested in asset-backed securities, mortgage-backed securities and collateralized debt obligations.
That strategy flew in the face of conventional wisdom, alleges the claim.
Stable value funds, which are included in almost two-thirds of all defined contribution plans, are designed to preserve participants’ capital while providing steady returns, typically by investing in a high-quality fixed income portfolio with an intermediate duration. They are designed as a safe option for participants to counter more volatile equity funds.
Fidelity trustees shifted the MIP fund’s aggressive investment strategy to an “excessively conservative direction” by 2011, when almost 44 percent of the fund was invested in low-yielding U.S. Treasuries.
At that time the average stable value fund allocated only 22 percent of assets to Treasuries, according to the Stable Value Investment Association.
The shift to a conservative strategy amounted to a “gratuitous benefit” to the MIP fund’s so-called “wrap” providers, which provide investments to protect the principal in stable value funds.
The conservative investment strategy reduced the risk that the wrap providers would have to pay guarantees to the MIP fund. AIG, J.P. Morgan Chase Bank and State Street Bank were among the providers.
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.
“Effectively, Fidelity paid for the problems that its mismanagement created with the Wrap Providers by bailing out the Wrap Providers with plan participants’ money,” says the complaint.
The suit also alleges Fidelity misled participants by using a money-market benchmark to gauge the fund’s performance, a violation of disclosure requirements under the Employee Retirement Income Security Act, the suit claims
Between 2010 and 2013, the MIP fund returned less than the inflation rate, and underperformed stable-value fund benchmarks.
As the MIP fund underperformed its peers, it charged participants excessively high fees, the complaint alleges.
The 2012 expense ratio for the fund was 69 basis points, while stable value funds averaged 41 basis points.
The two named plaintiffs are Barnes and Noble employees that first invested in the MIP fund in 2009. The case, Ellis et al v. Fidelity Management Trust Co., was filed in the U.S. District Court for the District of Massachusetts.
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