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Is Float Income a Plan Asset?

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The U.S. District Court for the District of Massachusetts (“USDC”) has recently held in the case In Re Fidelity ERISA Float Litigation, Civil Action No. 13-10222, that, under the circumstances of the case, float income is not a plan asset and, thus, Fidelity (as service provider) was not a fiduciary as to float. In essence, the controversy revolves around whether float income earned on monies pending a transaction constituted plan assets pursuant to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Background:
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 alleged that Fidelity breached its fiduciary duty in the management of float income as record keeper for several plans, since it retained such float income as additional compensation. Fidelity asserted that Plaintiffs’ claim fails as a matter of law (i) because float is not a Plan asset; and (ii) because it (Fidelity) is not an ERISA fiduciary as to such float.

USDC holding:
According to the USDC, ERISA nowhere contains a comprehensive definition of what constitutes plan assets. Nonetheless, the U.S. Department of Labor (“DOL”) has consistently stated that plan assets are to be identified on the basis of ordinary notions of property rights under non-ERISA law. Therefore, the USDC stated that the relevant inquiry to resolve this issue was whether cash proceeds from the sale of the mutual fund shares are Plan assets once the shares are sold. Accordingly, the court stated that once the mutual funds shares are sold, unless the plan documents clearly demonstrate a contrary intent, they are not plan assets and any further obligation that the service provider has to the beneficiaries constituted a straightforward creditor-debtor relationship. Since none of Plaintiff’s allegations supported the inference that the funds retained their status as Plan assets, the USDC dismissed the case.

DOL’s Interpretation:
The ruling by the USDC appears at stress with guidance issued by the DOL (see DOL Adv. Op. 93-24A (Sept. 13, 1993) and DOL Field Assistance Bulletin 2002-3 (Nov. 5, 2002)) which states its position that float income is generally considered a plan asset.

What should plan sponsors do?
Float litigation and controversies surrounding float can be expected to continue based on the opposing views on the matter by some courts and the DOL. We strongly recommend plan sponsors and ERISA plan providers to: (a) ensure all service agreements make reference to which entity will be entitle to retain float; (b) consider appropriateness of the float being retained as part of the overall service provider agreement; and (c) 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.