Fidelity Sued Over Money Market Fund Fees

Certain "retail class" investors in the Fidelity Government Money Market Fund are losing millions of dollars a year to high expenses when they're eligible for lower-cost "premium" shares, customers allege in a proposed class action lawsuit.

Fidelity lets certain customers holding the fund's retail share class (SPAXX) "needlessly incur higher expenses" even when eligible for its lower-expense but otherwise identical premium share class (FZCXX), according to a lawsuit filed last week against Fidelity, CEO Abigail Johnson and other fund officials in U.S. District Court for the Southern District of New York.

"These unnecessary expenses cost these shareholders millions of dollars each year, reducing their return on investment in the Government Fund and unjustly enriching Fidelity," the complaint contends.

The fund's retail and premium shares are identical except for the minimum required to initially invest and the operating expenses charged to shareholders, the suit says. Retail shares have no investment minimum and a gross expense ratio of 0.42%. Premium shares have a $100,000 investment minimum and a gross expense ratio of 0.36%.

The action seeks relief for retail class shareholders who meet the investment minimum for premium class shares but are charged the higher expenses for retail class shares.

Fidelity and related defendants "could easily remedy this overcharging through share class conversion — the commonplace practice of automatically converting an eligible investor's shares from one share class to another lower-expense class within the same mutual fund," the lawsuit contends.

Auto-conversion is common in the mutual fund industry, the complaint says.

Fidelity itself provides for auto-conversion in other mutual funds for shareholders who meet the investment minimum for a lower-expense class, but not for the Government Fund, according to the complaint.

Comparable mutual funds from competitors like Vanguard and T. Rowe Price similarly provide for such auto-conversion, the complaint says.

Conversion wouldn't harm shareholders or the fund, according to the lawsuit, which contends premium-class expenses are typically 24% lower than expenses for the retail class. "The savings to the Class Shareholders would be substantial," the suit says.

Fidelity, as the fund's investment manager, "has profited handsomely" from the situation, according to the complaint, which alleges the fund giant collects more in fees annually from the Government Fund than from any other Fidelity mutual fund — specifically $1.95 billion in the past three fiscal years.

"The overcharges to Class Shareholders improperly increase these fees. Fidelity has knowingly aided and abetted the Trustee and Officer Defendants' fiduciary duty breaches and makes unjustified profits from the excess expenses that should remain in the Class Shareholders' pockets," the lawsuit alleges.

Trustee and officer defendants' "dereliction of their fiduciary and contractual duties, with Fidelity's assistance, has resulted in enormous losses" for affected shareholders, the lawsuit alleges. It seeks injunctive relief and compensation for millions of dollars in alleged damages.

The named plaintiffs, New York residents Bryan Davis and Ethan Sam, are Fidelity clients who hold retail class shares and say they meet the investment minimum to qualify for premium shares.

The suit claims breach of fiduciary duty against trustee and officer defendants, breach of implied good faith and fair dealing against trustees, and unjust enrichment and aiding and abetting fiduciary duty breaches against Fidelity.

"Fidelity emphatically denies the allegations and will defend against the complaint vigorously," a company spokesperson told ThinkAdvisor by email Wednesday.

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