ERISA-First Circuit Holds That Float Is Not A Plan Asset, So A Trustee Does Not Breach ERISA Fiduciary Duty By Retaining Interest Earned On the Float

In Kelley v. Fidelity Management Trust Company, No. 15-1445 (1st Cir. 2016), the First Circuit Court of Appeals (the “Court”) faced an appeal from the district court’s dismissal of a putative class action filed by retirement-plan participants and one plan administrator. They had claimed that defendants are dealing with plan assets in breach of fiduciary duties imposed by ERISA. Upon reviewing the case, the Court affirmed the district court’s decision.

In this case, the defendants are various Fidelity entities that had trust agreements with the several 401(k) plans (collectively “Fidelity”).   As part of its duties, Fidelity effected withdrawals from the plans. In turn, as part of the withdrawal process, when a participant requested a withdrawal from the plan, any shares of a mutual fund, in which his or her account was then invested, were redeemed by the mutual fund’s payment of money in an amount equal to the market value of the shares. Fidelity would earn and retain interest on the “float” resulting from the mutual fund payment. Plaintiffs allege that Fidelity breached its fiduciary duties under ERISA, particularly the duties requiring a trustee to act in the best interest of participants and beneficiaries and to avoid self-dealing, in earning and retaining this interest.  That is, Fidelity breached its fiduciary duty by using the float to earn interest for itself, rather than for the benefit of the plans by giving the plans the interest.

However, the Court said that, for the plaintiffs’ claim to go forward, the float would have to be a plan asset for ERISA purposes. The float is not a plan asset, since the payout from the mutual fund does not go, and is not intended to go, to the plan. The plan has no claim to the float. Consequently, the plaintiffs’ claims must be dismissed.

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