Fidelity’s Use of Float Income Not Improper

An appellate court ruled that the float income incurred when making distributions to retirement plan participants are not plan assets.

The 1st U.S. Circuit Court of Appeals has ruled that “float income” Fidelity retained in the process of making distributions to retirement plan participants are not plan assets, so Fidelity did not violate its fiduciary duties under the Employee Retirement Income Security Act (ERISA).

The ruling was in line with a district court ruling in the case.

In two lawsuits, both filed in the U.S. District Court for the District of Massachusetts, retirement plan participants and one plan administrator claimed Fidelity breached its fiduciary duties by not by failing to distribute float income solely for the interest of the plans. The float income was earned on assets Fidelity redeemed for participants requesting a distribution from the plan and placed into an interest-bearing account (called FICASH) until the distributions were made. The assets remained in FICASH for one day if participants were paid electronically, but if participants requested a check, the assets remained in the account until the check was cashed.

The appellate court noted that the participant plaintiffs in the lawsuit claim no direct stake in the plan assets they say are being improperly used. “They do not allege that they are or will be short so much as a penny of any benefit to which they are entitled under the terms of their plans,” the opinion says. Instead they bring claims on behalf of the plans themselves, contending that the plans are being cheated of certain plan assets. “Given this posture, it is notable that the participants are joined as plaintiffs by only one plan administrator. Thus, whatever mischief the participants see in defendants’ actions, the concern apparently is shared only halfheartedly by the plans themselves. That is likely because the behavior complained of is nothing other than what the plans expected,” the court notes.

NEXT: The arguments

The appellate court found the agreements between Fidelity and the plans, cited in the complaint and attached to the motion to dismiss, confirm that Fidelity's duty is to make a distribution by a route incapable of providing any benefit to the plan from temporary use of the cash. The court also cites a document that suggests the plans are not entitled to hold uninvested cash—"The Trust Fund shall be fully invested . . ."

The court said if the payout from the redemption were going to the plan itself, ordinary notions of property rights probably would dictate that the substitute cash becomes an asset of the plan upon the exchange. But, the payout from the redemption does not go, and is not intended to go, to the plan itself. “Plaintiffs allege no facts to support the proposition that the same cash becomes a plan asset simply because it moves, not directly from the fund to the participant, but from the fund through Fidelity on its way to the participant.     

The court did not consider arguments brought by the Department of Labor in an amicus curiae brief supporting plaintiffs. It said the Secretary of Labor contends that Fidelity's use of float violated ERISA fiduciary duties, not because float is a plan asset, but because Fidelity failed to seek and obtain the plans' permission to use float as it did. “Plaintiffs did not press a failure-to-obtain-agreement claim in the district court or in their opening brief here, and their reply brief's unsuccessful attempt to cast the Secretary's position as their own is, in any event, too little too late,” the opinion says.

In a final point in support of its decision, the court noted that in Tussey v. ABB, Inc., the 8th U.S. Circuit Court of Appeals reached the same conclusion on materially similar facts.

The 1st Circuit’s opinion is here.