DOL ARGUES AGAINST CONTROVERSIAL FLOAT PRACTICE BY ERISA SERVICE PROVIDERS
On March 2016, the U.S. Court of Appeals for the First Circuit (“First Circuit”) heard oral arguments in the case In Re Fidelity ERISA Float Litigation, No. 15-1445, regarding the controversial practices of Fidelity, as service provider to multiple retirement plans covered by the Employee Retirement Income Security Act of 1964, as amended (“ERISA”), of using float income to defray plan expenses, where trust agreements neither permit or prohibit this practice. The U.S. Department of Labor (“DOL”) appeared as amicus curiae and presented its oral argument against Fidelity’s practices.
Plaintiffs-Appellants (“Plaintiffs”) include participants of various retirement plans that entered into trust agreements with Fidelity to establish trusts to hold plan assets. The Plans had ownership interest in the shares of mutual funds in which it invested. However, those shares were sold by Fidelity when withdrawals were requested by plan participants and the proceeds of the sale of such plan assets were deposited in accounts owned and controlled by Fidelity. These proceeds or interests are generally referred to as “float”.
Plaintiffs filed a claim against Fidelity before the U.S. District Court for the District of Massachusetts (“USDC”) alleging that Fidelity breached its fiduciary duty in the management of float income as service provider for several plans, since it retained such float income as additional compensation. Fidelity moved to dismiss the claim alleging, among other things, that (i) float income is not a plan asset; (ii) float income was used to pay administrative fees accrued by third-party financial institutions; and (iii) it (Fidelity) is not an ERISA fiduciary as to such float.
The USDC dismissed the case. It concluded that, in this case, float income is not a plan asset because Fidelity owned the accounts that generated said float income. Consequently there is no violation of ERISA with regard to the float. Alternatively, it held that even if float were a Plan asset, Fidelity was not an ERISA fiduciary as to float. Because Fidelity conveyed withdrawals as dictated by the trust agreements, and the Plans’ governing documents stated that Fidelity was not authorized to retain uninvested cash unless expressly directed to do so by the plan administrator, it was reasoned that Fidelity was not acting as an ERISA fiduciary when handling float income. If the Plans wanted to make Fidelity responsible to pay the float to them or their participants, they could have contracted for said arrangement.
DOL’s brief and argumentation:
The DOL disagreed with the USDC’s conclusion that the burden was on the participants to negotiate for a different float arrangement. It placed the responsibility to disclose float with both the fiduciaries and service providers. Thus, it reasoned that Fidelity engaged in prohibited self-dealing and acted disloyally by allegedly retaining float income generated from its administration of the plans and distributing such income to non-plan entities, because it allegedly failed to disclose the existence of such income and Fidelity’s governing trust agreements did not expressly authorize it to retain such income or use it for non-plan purposes.
Case Implications for Plan Sponsors and ERISA Plan Providers:
If the First Circuit adopts the DOL’s position, ERISA plan providers may not retain float income, unless (i) the fiduciary disclosed sufficient information to enable the plan to make an informed decision with respect to the arrangement; (ii) the plan fiduciary has reviewed and agreed to the arrangement, and (iii) the arrangement does not permit the fiduciary to affect the amount of its compensation. Nonetheless, plan sponsors and ERISA plan providers should: (i) ensure all service agreements indicate which entity will be entitle to retain float and when; (ii) consider appropriateness of the float being retained as part of the overall service provider agreement; and (iii) consider disclosure impact to participants and beneficiaries.
This document has been prepared for information purposes only and is not intended as, and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.