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Northwest OH Legal Blog

Tuesday, August 23, 2016

Fidelity Investments Prevails in ERISA Float Litigation

A recent federal appellate court decision highlights the need for ERISA fiduciaries to evaluate the treatment of a particular type of interest called “float income” to ensure compliance with ERISA.  In In Re Fidelity ERISA Float Litigation, No. 15-1445, 2016 U.S. App. LEXIS 12874 (1st Cir. July 13, 2016), the United States Court of Appeals for the First Circuit joined the United States Court of Appeals for the Eighth Circuit in finding that the practice of Fidelity Investments and various entities tied to Fidelity Investments (collectively, “Fidelity”) of earning overnight “float” income on the cash paid out to 401(k) plan participants who were redeeming shares in mutual funds did not violate Fidelity’s duty of loyalty or the prohibition against self-dealing under the Employee Retirement Income Security Act of 1974 (“ERISA”).  In so holding, the court observed that under the terms of the trust agreements between Fidelity and the plan sponsors of the 401(k) plans, Fidelity acted as an intermediary by— 

  • opening and maintaining trust accounts for the plan and separate accounts for each participant,
  • accepting contributions from participants and the employer,
  • investing those contributions in mutual funds, and
  • when requested by a participant to make a distribution, facilitating the redemption of the participant’s shares in the mutual fund.

DOL Guidance.  In ERISA Advisory Opinion 93-24A (September 13, 1993) and in an August 1994 information letter, the United States Department of Labor (“DOL”) articulated its long-held position that the retention of float income without adequate disclosures can constitute prohibited self-dealing under ERISA.  DOL Field Assistance Bulletin 2002-3 discusses the necessary disclosures that a fiduciary should make to reduce the risk of self-dealing, as well as the steps that fiduciaries must take to comply with their ERISA obligations with respect to float income.

Background.  In In Re Fidelity ERISA Float Litigation, the plaintiffs brought a class action against Fidelity.  In their complaint, the plaintiffs alleged that Fidelity violated ERISA by “appropriating float earned on Plan assets to pay banking fees that Fidelity was required to pay” and “misappropriating float income for use of clients other than the participants in the Plan.”  The plaintiffs did not claim a personal stake in the float; indeed the court noted that plaintiffs were not “short so much as a penny” and had “no direct stake in the plan assets.”  Rather, the plaintiffs alleged that by returning the float income, which they claimed was a plan asset, to the mutual fund and not to the 401(k) plan, Fidelity breached its ERISA fiduciary duties.

Under Fidelity’s disbursement practice, Fidelity followed the following procedures:

1.  Upon request by a participant to receive a distribution from the plan, the participant’s mutual fund shares were redeemed by the mutual fund.  The amount of the redemption was based on the market value of the shares using an end-of-trading day value.

2.  Once valued, the participant’s cash was transferred into a “redemption” bank account owned and registered to Fidelity, and then transferred into a Fidelity-owned interest-bearing account.

  3. The next day the value of the participant’s mutual fund shares was transferred back to the redemption account and then electronically disbursed to the participant.  (Participants who opted to receive paper checks instead of electronic disbursements underwent a similar process, except that interest was earned until the participant cashed the check.)

  4. The interest earned, the so-called “float,” while the money was held in the Fidelity-owned interest-bearing account was then deposited back into the mutual fund.  None of the float ever reverted to the plan or to the participants who were receiving their requested distributions.

Holding.  The federal appellate court gave two reasons for rejecting the plaintiffs’ argument that Fidelity’s disbursement practice violated ERISA.  First, relying primarily on Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014), which involved similar but not identical facts, the court held that float income was not a plan asset.  Once a participant directed that the plan sell his or her mutual fund shares, the shares were redeemed and the proceeds were transferred to accounts owned and controlled by Fidelity.  The participants retained a right to the proceeds of the mutual funds in which they invested, but not to any interest earned on the proceeds held in Fidelity accounts.  The court emphasized that if the plan documents contained language to the contrary—for example, if the plan specified that beneficiaries would be paid from accounts owned by the plan—float income could remain a plan asset.

Second, the court held that Fidelity was not an ERISA fiduciary as to the float income because Fidelity complied with plan documents and gave the participants immediate access to the promised funds.

Takeaways.  The court’s holding in In Re Fidelity ERISA Float Litigation that float income is not a plan asset relied on three key factors:  the language in the plan document, the handling of the assets, and whether participants received less than they were entitled to receive.  In the wake of the court’s decision in In Re Fidelity ERISA Float Litigation, ERISA plan fiduciaries should consider taking the following proactive steps:

1. Fiduciaries should review plan documents, third party administrator agreements, and trust documents to analyze the structure of accounts that generate float income.  Recent cases indicate that such accounts can be structured so that float income is not considered a plan asset.

2. If float income is a plan asset, fiduciaries should follow DOL guidance to ensure that the income is treated properly under ERISA.

3. If float income is not a plan asset, fiduciaries should monitor judicial and regulatory developments.  Court decisions and DOL regulations often expand the boundaries of fiduciary responsibility, and float income that is currently not considered a plan asset under In Re Fidelity ERISA Float Litigation and Tussey might acquire plan asset status as the law develops.

If you have any questions or concerns regarding this communication, please do not hesitate to call Allotta | Farley Co., LPA at (419) 535-0075 or email megarner@allottafarley.com.


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