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