A class-action suit against a major 401(k) provider charges that mutual fund companies act illegally when they rebate a share of administrative fees to the plan vendor.

The lawsuit, filed in a federal court in Connecticut, charges Nationwide Financial Services with engaging in the practice otherwise known as revenue sharing. The practice is not unusual in the 401(k) industry, but the suit claims Nationwide has been particularly aggressive in seeking it.

Plaintiffs further argue that Nationwide became a fiduciary under ERISA when it accepted administrative fees deducted from plan assets, and that the practice "breaches fiduciary responsibility because it benefits [Nationwide] and not the plan participants," says plaintiffs’ attorney Roger Mandel.

Nationwide has filed to dismiss the case, but should it go forward, it will be the first time a court rules on the legality of revenue sharing.

"We have every reason to believe we have conducted our business in an appropriate manner," a company statement says. "We believe the plaintiffs’ lawyers are trying to stretch the ERISA law beyond its recognized boundaries."

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.