Fidelity Faces 401(k) Float Income Class Action in Mass. - U.S. First Circuit
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Fidelity Faces 401(k) Float Income Class Action in Mass.

Fidelity Investments, the largest U.S. provider of workplace retirement plans, is facing a putative class action in Massachusetts alleging that Fidelity improperly uses customer money earned in overnight accounts to pay its own operating expenses, Reuters reports.

Earlier this month, three Massachusetts residents filed suit against Boston-based Fidelity, accusing the company of using "float income" -- income generated from retirement fund assets -- by temporarily investing it for its own benefit, in violation of ERISA.

A recent ruling by the Eighth Circuit sheds some light on how the court might rule.

Float Income Class Action

The class action, brought by participants in 401(k) plans for Bank of America, EMC Corp. and Safety Insurance Co. on behalf of those similarly situated, alleges that Fidelity and its subsidiaries generated extra income when plan assets were placed in interest-bearing accounts, pending investments or withdrawals of the assets.

The argument is that Fidelity breached their fiduciary duty and engaged in prohibited transactions involving plan assets by doing the following:

  • transferring float income to Fidelity mutual funds instead of to the plans; and
  • using the float income funds to offset the company's operating expenses, and for the benefit of Fidelity's mutual funds, instead of for the benefit of the plans themselves.

Recent 8th Cir. Ruling on Float Income Ownership

The Eighth Circuit recently ruled on a case involving similar accusations against Fidelity and the plan sponsor, ABB Inc.

In that case, the Eighth Circuit affirmed a lower court's decision that held ABB Inc. had breached its fiduciary duty to its workers when it:

  • failed to monitor Fidelity's plan record-keeping costs;
  • failed to calculate the amount the plan paid to Fidelity for recordkeeping through revenue sharing; and
  • failed to determine whether Fidelity's pricing was competitive.

But the court did not find a breach of duty by Fidelity because the plan participants failed to show the float income was a plan asset under the circumstances of the case, the court ruled. Siding with Fidelity, the panel held that when an exiting participant chooses to accept a check, the "funder of the check owns the funds in the checking account until the check is presented and this is entitled to any interest earned on the float."

The Lesson: Avoid Fiduciary Mistakes With Float Income

Regardless of how the court rules, practitioners should be proactive and advise clients who are fiduciaries to ask service providers questions about current arrangements before signing new contracts. Doing so will help clients avoid making fiduciary mistakes with 401(k) float income.

Here are a few sample questions to ask, as suggested by Bloomberg BNA:

  • How will any float income be earned and who retains it?
  • What standards are used to determine the length of the float income on contributions that are pending investment?
  • What is the deadline for investing a contribution?
  • When does the float period begin and end?
  • Does the float period include mailing time and other relevant time periods that might affect checks pending distribution?
  • What interest rate will be used during the float and how is it calculated?

Stay tuned to see how this case shapes up and compares to the ruling in the Eighth Circuit.

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