A recent Massachusetts district court decision in In Re Fidelity ERISA Float Litigation highlights the need for ERISA fiduciaries to evaluate the treatment of a particular type of interest called “float income” to ensure compliance with ERISA. The Department of Labor has long taken the position that retention of float income without sufficient disclosures can constitute prohibited self-dealing. In Re Fidelity ERISA Float Litigation and a March 2014 Eighth Circuit decision, Tussey v. ABB, indicate that fiduciaries should review the structure and documentation of accounts that generate float income to determine whether the interest is a plan asset. As discussed in more detail below, if float income is determined to be a plan asset, fiduciaries should ensure that they comply with Department of Labor guidance.

What is Float Income

In the course of ERISA plan transactions, funds may be placed in short-term accounts that generate interest. For example, when participants contribute to or withdraw funds from a defined contribution plan investment option, it is a common practice for third party administrators to hold these funds temporarily in overnight accounts before completing the transaction. Interest earned on these accounts is known as “float income.”

Department of Labor Guidance

In ERISA Advisory Opinion, 93-24A (September 13, 1993), and in an August 1994 information letter, the Department of Labor articulated its long-held position that retention of float income without adequate disclosures can constitute prohibited self-dealing under ERISA. Field Assistance Bulletin 2002-3 discusses necessary disclosures to reduce the risk of self-dealing, as well as steps fiduciaries must take to comply with their ERISA obligations with respect to float income.

In Re Fidelity ERISA Float Litigation

In In Re Fidelity ERISA Float Litigation, plaintiffs brought a class action alleging that Fidelity investment entities violated ERISA by “appropriating float earned on Plan assets to pay banking fees that Fidelity was required to pay” and “misappropriating float income for use of clients other than the participants in the Plan.” Under Fidelity’s disbursement process, when Fidelity received a request to withdraw funds from the plan, it would sell the mutual fund shares in the participant’s account and move the funds to a redemption bank account. Fidelity would then transfer the funds overnight from the redemption account to an interest-bearing account owned and controlled by Fidelity. The following day, Fidelity would transfer the principal—but not the interest earned overnight—to a bank account that would be used to disburse funds to participants. In this manner, participants would receive the full amount of their disbursement but not any additional float income. Fidelity retained a portion of this float income—but also bore the cost of the investment fees on the overnight account.

The District court gave two reasons for rejecting plaintiffs’ argument that this practice violated ERISA. First, relying primarily on Tussey, which involved similar but not identical facts, the court held that float income was not a plan asset. Once participants directed that the plan sell mutual fund shares, the shares were redeemed and the proceeds were transferred to accounts owned and controlled by Fidelity. The participants retained a right to the proceeds of the mutual funds in which they invested but not to any interest earned on the proceeds held in Fidelity accounts. The court emphasized that if the plan contained language to the contrary—for example, if the plan specified that beneficiaries would be paid from accounts owned by the plan—float income could remain a plan asset.

Second, the court held that Fidelity was not an ERISA fiduciary as to float because Fidelity complied with plan documents and provided the beneficiary with immediate access to the promised funds.

Takeaways for Fiduciaries

1. Fiduciaries should review plan documents, third party administrator agreements, and trust documents to analyze the structure of accounts that generate float income. Recent cases indicate that such accounts can be structured so that float income will not be a plan asset.

2. If float income is a plan asset, fiduciaries should follow Department of Labor guidance to ensure that the income is treated properly under ERISA.

3. If float income is not a plan asset, fiduciaries should monitor judicial and regulatory developments. Court decisions and Labor Department regulations often expand the boundaries of fiduciary responsibility, and float income that is not considered a plan asset under the Fidelity and Tussey decisions might acquire that status as the law develops.