Court Finds No Fiduciary Breach on Use of Float

By Nevin Adams • 3/30/2015 • 0 Comments

A federal district court has dismissed retirement plan participant claims that Fidelity violated ERISA by keeping or improperly using “float income” generated by their plan(s).

The ruling came in the consolidation of four class actions in the U.S. District Court for the District of Massachusetts challenging whether float income earned on monies pending a transaction was a “plan asset.” In re Fidelity ERISA Float Income, No. 13-10222, 2015 WL 1061497 (D. Mass. March 11, 2015). The plaintiffs, six plan participants and one plan administrator, filed those four separate lawsuits in 2013, asserting claims on behalf of a class of thousands of plans serviced by the defendants, affiliated entities that provided services to the plans and/or its investments. They alleged that if float was a plan asset, then Fidelity breached its fiduciary duties and committed a prohibited transaction by keeping this float income for its own benefit. 

Applying ordinary notions of property rights, the District Court held that float income was not a plan asset.  

How it Worked 

According to a report by Proskauer Rose LLP, when Fidelity received a withdrawal request from a mutual fund, it would move the funds to a redemption bank account or to an interest bearing disbursement bank account, depending on whether the participant elected disbursement by electronic transfer or by check. Fidelity allocated the float income to mutual funds or to offset bank expenses. 

Here the plaintiffs admitted that the assets of the mutual fund were not plan assets, but argued that the plans’ ownership of shares in the mutual funds made the plans the “beneficial” owners of the funds transferred to handle the withdrawal requests from these funds. However, applying ordinary notions of property rights, the district court disagreed, explaining that nothing in the plan documents changed mutual fund assets into plan assets simply because they were transferred to an account from which they would be distributed to participants. The court acknowledged that this could have been provided for in the plan documents but was not, and distinguished this from a case in which disbursements had been made contrary to the plan documents. The court also noted that Fidelity’s fiduciary obligations were discharged once it made disbursements in accordance with the plan documents.

Perhaps more significantly, the court questioned Department of Labor guidance that suggested a trustee’s use of float income is a prohibited transaction unless the trustee discloses and negotiates retention of the float income with the plan fiduciary. The court noted that this DOL guidance failed to address the antecedent question of whether the funds in the disbursement accounts were in fact plan assets, and this guidance also predated three recent circuit court decisions that held these types of funds are not plan assets.

Proskauer Rose LLP notes that the case follows a line of recent court rulings applying ordinary notions of property rights to analyze whether disbursement accounts, and whether income earned on those disbursement accounts, are “plan assets” — and that, unless the plan documents impose a property interest on these accounts, the courts are concluding that these accounts are not “plan assets.”

Goodwin Procter represented the defendants.

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