In an amicus curiae brief filed with the 1st U.S. Circuit Court of Appeals, the Department of Labor (DOL) notes that the Employee Retirement Income Security Act (ERISA) prohibits retirement plan fiduciaries from using undisclosed float income obtained through plan administration for any purpose other than to benefit the ERISA-covered plan.
The brief was filed for the case of Kelley v. Fidelity Management Trust Co. in which participants from three 401(k) plans administered by Fidelity allege the firm engaged in prohibited transactions and breached its fiduciary duty by using float income to pay itself trust and recordkeeping fees above and beyond the fees authorized in the trust agreements between it and the plans. When plan assets are deposited on an interim basis in interest-bearing accounts before invested or disbursed as directed by the plans’ participants, the income earned on or derived from the assets while invested in such accounts is “float income.”
In the U.S. District Court for the District of Massachusetts, Fidelity moved to dismiss on numerous grounds, including that float income is not a plan asset, that Fidelity is not an ERISA fiduciary with regard to float, and that, even if the float income is a plan asset, Fidelity properly used float income for the benefit of the plans to pay administrative fees accrued by third-party financial institutions.
The District Court granted the motion to dismiss, determining that, as a matter of property law, the plans “do not own the underlying assets of the mutual fund in which they invest” and have only “a property interest in the shares of the mutual fund in which the participant has invested.” The District Court concluded that, because Fidelity owns the accounts that generated float income, that income is not a plan asset and consequently there is no violation of ERISA with regard to the float.
The District Court also concluded that Fidelity is not an ERISA fiduciary when it comes to the float practices, reasoning that because Fidelity had complied with plan documents in processing withdrawals from the plan, it fulfilled its fiduciary duties. “As a result,” the court said, “Fidelity was no longer acting as a fiduciary” when it engaged in the float practice at issue. If the plans wanted to make Fidelity responsible to pay the float to them or their participants, the court reasoned that the onus was on them to negotiate for this arrangement.NEXT: The DOL disagrees
In its brief, the DOL said it “fundamentally disagrees” with the District Court’s conclusion that the onus was on the participants to negotiate for a different float arrangement. The DOL’s float guidance specifically and correctly places that responsibility with the fiduciaries and service providers to disclose float, and the allegation in this case is that the plan sponsor and participants were never in a position to negotiate float because it was never disclosed.
Specifically, the DOL noted it has issued three pertinent guidance documents concerning fiduciary duties for float income. These documents all take the position that an ERISA fiduciary engages in prohibited self-dealing and acts disloyally when it retains float income, unless: the fiduciary disclosed sufficient information to enable the plan to make an informed decision with respect to the float arrangement; the plan has reviewed and agreed to the arrangement; and the arrangement does not permit the fiduciary to affect the amount of its compensation.
The agency said, if the allegations that Fidelity Trust 1) did not disclose the float income; 2) did not negotiate for extra compensation in the form of the float income or provide the plans with information sufficient to understand the defendants’ compensation; and 3) had discretion to use the float income to pay themselves excessive compensation are proven, it would establish that Fidelity, as a fiduciary to the plans, “deal[t] with the assets of the plan[s] in [its] own interest or for [its] own accounts” and caused the plans to engage in a transaction that it knew or should have known constituted a “direct or indirect transfer to, or use by or for the benefit of, a party in interest [i.e., Fidelity], of any assets of the plan[s].”
The DOL also disagreed with the District Court’s holding that Fidelity Trust, a trustee to the plans, was not a fiduciary with respect to float, noting that Fidelity allegedly exercised discretion over plan assets outside the bounds of the plan documents, which did not expressly permit Fidelity’s float program. The brief says Fidelity was a fiduciary with respect to the plans’ redemptions, including the accrual of float income because it allegedly “exercise[d] discretionary authority or discretionary responsibility in the administration of [the plans]” by directing and controlling, from start to finish, the process of the plans’ redemptions. In addition, the DOL says, Fidelity was a fiduciary because it “exercise[d] any authority or control respecting the management or disposition of [the plans’] assets” when Fidelity redeemed or sold the plans’ ownership interest in the mutual fund investments and transferred cash to the interest-bearing float accounts.
The DOL’s amicus curiae brief is here.