Court Dismisses Fidelity Float Income Suit

A federal district court has ruled float income is not a retirement plan asset belonging to participants.

The United States District Court for the District of Massachusetts dismissed an Employee Retirement Income Security Act (ERISA) complaint filed by participants in retirement plans administered by Fidelity Investments who claimed Fidelity improperly used float income generated by the plan.

Plaintiffs brought the complaint on behalf of the retirement plans in which they have been participants or administrators, which entered into trust agreements with Fidelity to hold and invest plan assets. They alleged that defendants—including FMR LLC, Fidelity Management Trust Company (FMTC), Fidelity Management and Research Company (FMRC), and Fidelity Investments Institutional Operations Company, Inc. (FIIOC)—violated ERISA by keeping or improperly using “float income” generated by the plan through certain overnight and transition investments of plan assets.

The district court determined that, although all of the accounts described in the complaints incurred bank expenses not specifically outlined in the relevant fee agreements, these expenses were part of Fidelity’s ordinary operating expenses for recordkeeping and administering the plans. Thus, Fidelity’s use of float income—which plaintiffs allege belong to them—to pay these recordkeeping and administrative expenses was acceptable.

Plaintiffs alleged that these expenses were outside the scope of the agreed-upon fees they would pay Fidelity and, therefore, Fidelity’s practice amounted to a violation of Fidelity’s fiduciary duties.

The court’s reasoning continues: “At base, plaintiffs’ allegations rise and fall on the premise that float income is a plan asset. Although the Court may rely upon the allegations in the operative complaint, the Court notes that there is little debate among the parties about the factual allegations as the parties’ dispute focus upon whether the float at issue is, or is not, a plan asset. Fidelity asserts that float is not a plan asset and, therefore, the plans have no right to any income earned on the float.”

The litigation is a combination of a number of related law suits filed against the Fidelity companies. The suits level similar claims and involve plans with trust agreements that “are substantially the same in all material respects” to the plan underlying the current action. In short, the dismissal finds Fidelity has discretion over float income because returns on participant assets are not necessarily covered by ERISA’s prohibited transaction provisions during the course of certain routine plan transactions and investing actions.

Plaintiffs alleged that Fidelity’s ERISA violations arise specifically from “(i) their practice of appropriating float earned on plan assets to pay banking fees that Fidelity was required to pay, and (ii) their practice of misappropriating float income for the use of clients other than the participants in the plans.”

According to the complaint, when plan participants withdrew funds from the plan a lump-sum disbursement was triggered, unless the plan participant had entered retirement and was receiving regular retirement payments. Fidelity’s disbursement process occurred in multiple steps. When Fidelity received a withdrawal request, it sold the mutual fund shares and moved the funds from the relevant investment option account to a redemption bank account. Electronic disbursements were paid to plan participants from the redemption bank account. 

Then, overnight, Fidelity would transfer the funds into an interest-bearing account owned and controlled by Fidelity, and the principal of the funds would be transferred back to the redemption bank account the following day. Case documents show any interest earned overnight was not transferred to the redemption bank account. This interest is generally referred to as “float”  income.

For participants who did not elect to receive an electronic disbursement, the withdrawn funds were transferred from the redemption bank account to an interest-bearing disbursement bank account, which issued a check to the participant in the amount of the withdrawn funds, but not including interest. Participants received the funds after they cashed or deposited the check.

This means Fidelity would retain some portion of the float income generated during the disbursement process and the remainder was credited to mutual funds. The plaintiffs alleged this practice violates ERISA, due to the Fidelity companies’ status as plan fiduciaries (see “Be Careful Not to ‘Float’ into ERISA Violations”).

Fidelity pointed to an earlier and closely watched case, Tussey vs. ABB, to make its argument. The case was recently denied an appeal by the U.S. Supreme Court, and Fidelity says its successful defense in that case is evidence of the propriety of its retention of float income. In that case a district court initially ruled Fidelity had breached its fiduciary duty by keeping float income. On appeal, the 8th U.S. Circuit Court of Appeals reversed, holding that Fidelity had not breached its fiduciary duties by failing to pay float income to the plan because “the participants failed to adduce any evidence the plan had any property rights in the float or float income.”

With regard to the “redemption” float—the type of float at issue in the Tussey action—the 8th Circuit held that the plaintiff-participants had failed “to establish the plan had any rights in the redemption account balance.” To reach this conclusion, the 8th Circuit considered that “as a matter of black-letter commercial law, the payee of an uncashed check has no title in or right to interest on the account funds.”

The district court in the current case noted that this is a topic that the Department of Labor (DOL) has addressed multiple times in recent years.

The district court's opinion is available here