Judge’s ruling on Fidelity share classes contrasts with another firm's costly tax settlements
Retail investors who claimed Fidelity “cheated” them on fees in a US$439.1bn money market fund just watched their case collapse.
A lawsuit accused Fidelity of keeping investors in higher‑cost “retail class” shares of the Fidelity Government Money Market Fund instead of moving them into lower‑cost “premium class” shares when they became eligible, according to Reuters.
US District Judge Margaret Garnett in Manhattan dismissed the case.
The investors said Fidelity unjustly enriched itself and that the fund’s board and investment managers breached their fiduciary duties by not automatically converting holdings once balances hit $100,000 in non‑retirement accounts or $10,000 in retirement accounts.
Retail investors alleged that Boston-based Fidelity shortchanged them out of millions of dollars by continuing to charge fees and expenses of up to 0.42 per cent on “retail class” investments instead of up to 0.32 per cent on “premium class” shares, as reported by Reuters.
They argued that the higher fees on one of the world’s largest cash vehicles came at their expense, even though they qualified for the cheaper share class.
Garnett rejected those arguments.
She said Fidelity fully disclosed the economic consequences of converting or not converting shares and found that investors neither proved those disclosures were misleading nor denied they could convert their shares on their own.
In her ruling, Garnett wrote that “against this backdrop, it was not ‘outside the bounds of reason’ for defendants to design the fund without an automatic conversion feature,” quoting the legal standard for gross negligence.
Lawyers for the investors did not immediately respond to requests for comment, and Fidelity and its lawyers also did not immediately respond to similar requests, Reuters reported.
The judge also drew a contrast with separate litigation involving Vanguard.
Garnett distinguished the Fidelity case from lawsuits accusing Vanguard of saddling retail investors in its target-date funds with big tax bills when it switched institutional investors into lower-cost shares.
She said that switch was “unexpected” and gave retail investors no say or notice.
Investors’ lawyers said Vanguard settled those target-date fund cases last year for an estimated US$158m.
In a related action, Reuters said US District Judge John Murphy in Philadelphia granted preliminary approval to a US$25m settlement resolving claims that Vanguard improperly saddled investors in its target-date funds with inflated tax bills.
Lawyers for the investors said the US$25m is in addition to a US$133m fair fund set up in a US Securities and Exchange Commission case.
Vanguard denied wrongdoing in agreeing to settle, Reuters reported.
The Vanguard litigation arose after the firm decided in December 2020 to reduce the minimum investment in lower-cost fund classes intended for institutional clients to US$5m from US$100m.
Many investors moved into those lower-cost institutional classes from higher-cost retail classes, forcing retail funds to sell assets to meet redemptions and pass taxable capital gains to the plaintiffs and other remaining investors.
The dismissed Fidelity lawsuit centred on a fund that remains dominated by the “retail class” at issue.
According to Fidelity’s website, cited by Reuters, US$406.4bn of the Fidelity Government Money Market Fund’s US$439.1bn in assets as of February 28 were in the retail share class.
Fidelity had US$7.1tn of assets under management at the end of 2025.
