In July, the Court of Appeals for the First Circuit rejected a claim that Fidelity breached its fiduciary duties by retaining “float” earned while Fidelity was handling 401(k) plan distributions. (Float is interest earned in short-term accounts used to facilitate the transfer of contributions to a plan or distributions to a participant or beneficiary.) The court dismissed the case after finding that the float retained by Fidelity was not plan assets. Further litigation is possible, however – the court noted that Fidelity may have violated its fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) in failing to obtain the plans’ approval for the float retention arrangement.
Retention of Float by Fidelity
According to the First Circuit’s opinion, distributions from mutual fund options under the plaintiff participants’ 401(k) plans were handled as follows: upon a participant or beneficiary’s request for a distribution, the mutual fund transferred the distribution amount to a redemption account owned by Fidelity, which then transferred the cash to its “FICASH” account, where it remained overnight before being transferred back (without interest) to the Fidelity redemption account. The distribution amount was then either disbursed electronically or transferred to a Fidelity disbursement account from which a check was issued. Fidelity used the float earned while distribution amounts were in FICASH overnight and the disbursement account before checks were cashed to defray bank expenses. The plaintiffs alleged that, in failing to credit the float to the plans, Fidelity breached its fiduciary duties.
Decision
After finding that the plaintiffs’ only timely claim was that Fidelity’s retention of float constituted a use of plan assets other than for the plans’ benefit, the First Circuit held that the case could not proceed because the distribution (and associated float) amounts at issue did not constitute ERISA plan assets. The court based its conclusion on two aspects of the distribution arrangement: the fact that the distribution amounts were not routed to the plans before being disbursed to participants and beneficiaries, and the fact that the mutual funds, not the plans, bore the risk of loss with respect to any distribution amounts lost before receipt by the participant or beneficiary. The opinion noted that the Court of Appeals for the Eighth Circuit, in 2014’s Tussey v. ABB, Inc., reached the same conclusion about the plan asset status of float retained by Fidelity.
DOL Position
In a friend of the court brief submitted in support of the plaintiffs, the Department of Labor (“DOL”) stated that Fidelity’s retention of float was an improper use of plan assets. The DOL argued that the case should proceed even if the court disagreed with that conclusion, however, as the plaintiffs had also alleged that Fidelity was not expressly permitted to retain float under the governing plan documents (and therefore had violated its fiduciary duties whether or not the float constituted plan assets). The First Circuit noted the DOL’s argument but declined to consider it on the grounds that the plaintiffs had not made that allegation on a timely basis.
Impact of Decision
In longstanding guidance, the DOL has taken the position that in order to avoid engaging in a prohibited transaction, service providers must disclose, and plan fiduciaries must understand, how float is earned, and plan fiduciaries must take any float retained by service providers into account in determining whether a service provider’s compensation is reasonable. In addition, both parties must avoid giving the service provider discretion to affect the amount of float it retains. The First Circuit’s decision in the Fidelity litigation and the Eighth Circuit’s decision in Tibble both conflict with this guidance, the premise of which is that float is a plan asset and float retention is a prohibited transaction issue. However, given that both decisions were based on the workings of the particular arrangements at issue rather than the general characteristics of float, future litigation could easily come out a different way, and there is no reason to expect that the DOL will revise its position. As a result, plan sponsors should continue to follow current DOL guidance.
We would be happy to answer any questions you may have about the establishment and disclosure of float retention arrangements.
