Is Your 401(k) Plan Income "Floating" Away? New Lawsuit Challenges Fidelity's Practices

by Carol I. Buckmann

carol@cohenbuckmann.com

Do you know how your trustee handles cash? 401(k) plan transactions aren’t instantaneous, so all plans will have situations in which cash is held pending investment, reinvestment or distribution.  These amounts may be held in a short term investment account pending required action, such as waiting for a participant to cash a benefit check.  A recent class action suit filed against Fidelity and two plan sponsors, United Airlines and Hewlett-Packard, claims that the income on these accounts should have been credited for the benefit of the plans and that Fidelity committed fiduciary breaches by keeping the float.  The suit also names the plan fiduciaries for allowing Fidelity to engage in these practices, which plaintiffs contend are prohibited transactions.

The Department of Labor’s Position. In its issued authority on float income, including FAB 2002-3, the Department of Labor treated float as a plan asset and cautioned providers to make disclosures about their float practices to avoid self-dealing and plan fiduciaries to monitor float income.  However, this suit comes on the heels of a dismissal of a similar suit (In Re Fidelity Float Litigation) in July by the Court of Appeals for the First Circuit.  The First Circuit decision cited other courts that had failed to uphold plaintiffs’ contention that use of float income was a violation of Title I of ERISA.  It will be interesting to see how plaintiffs fare in this new action, but since retained float may still be considered part of the service provider’s compensation, these lawsuits also bring to the forefront some issues plan fiduciaries should be considering in reviewing float practices. 

What the Courts Have Previously Held.  The cases that upheld the practice of fiduciaries keeping float stated that under normal concepts of property law, float was not a plan asset.  Therefore, trustees did not engage in self-dealing when they kept the float.  Those decisions might have come out differently if there were different language in the provider’s services agreement treating float as a plan asset. 

Monitoring Float Practices.  If float is not treated as a plan asset, the self-dealing claims in the new lawsuit should be rejected.  However, even if the plan sponsor is paying plan fees, it is advisable for   fiduciaries to know how much float the trustee or other provider is keeping, and the circumstances under which float arises and is retained.  Here are some issues to consider:

  • The fact that the trustee will retain float income and relevant details should be disclosed in the services agreement and the Section 408b-2 disclosure.  FAB 2002-3 says that relevant information includes the earnings rate and an estimate of anticipated income. However, many providers do not provide estimates in their disclosures, apparently taking the position that the float compensation is notpredictable.  Fiduciaries may need to ask follow up questions to get the information they need to monitor float, and to have the retained float reported to them.
     
  • The amount of float income is partly a factor of the amount of time the cash is held uninvested or undistributed because a check remains uncashed.  Fiduciaries can ask for the trustees’ policy or procedures regarding float to make sure that this period is not prolonged unnecessarily.  Fiduciaries may want their agreements to specify a maximum number of days in which cash contributions could be held in a cash account prior to investment.  
     
  • Even if the provider’s fees are paid by the plan sponsor, if the amount of retained float income is consistently higher than expected, it may be appropriate to renegotiate compensation.
     
  • Certain actions or inaction by plan fiduciaries can increase the float.  For example, a delay in giving instructions regarding investment of contributions may increase the amount of time the cash is held in the float account.  In addition, if plan records are not up to date and many distribution checks remain un-cashed because they are not sent to the current address, that may result in the cash being held in the float account until the check becomes stale.  (Finding addresses for these payees will also reduce the risk of audit problems, which was a subject of a prior  blog post (click here to read it).) 

Regardless of whether plaintiffs prevail in this new litigation, plan fiduciaries can protect themselves if they understand the details of their provider’s float policies and practices.