ERISA-Eighth Circuit Finds That Float Generated By 401(k) Plan Contributions Is Not A Plan Asset

In Tussey v. ABB, Inc., No. 12-2056, etc. (8th Cir. 2014), the Eighth Circuit Court of Appeals (the “Court”) faced, among other things, the issue of whether the defendants’ handling of float constituted a violation of the ERISA fiduciary duty of loyalty.

In this case, Fidelity Management Trust Company (“Fidelity”) was the trustee and recordkeeper of a 401(k) plan (the “Plan”). When a Plan participant or his/her employer made a contribution to the Plan, Fidelity processed the contribution to the Plan investment option designated by the participant and credited the participant’s account with shares in that investment option. The Plan became the owner of the selected investment option as of the date the contribution was made, entitling the Plan to any dividends or any other change in the fund that day. The actual contribution flowed into a depository account held at Deutsche Bank for the benefit of the Plan investment options (as opposed to the Plan itself). For logistical reasons, the contribution could not be distributed to the investment option until the next day. Money sitting in the depository account overnight before it is distributed to the Plan investment options is often described as “float.”

Fidelity temporarily transferred the float to secured investment vehicles to earn interest often called “float interest” . The following day Fidelity transferred the principal back to the depository account. Fidelity used the float income to pay fees on float accounts before allocating the remaining income to the investment option selected by the participant (and, again, not to the Plan itself) . The float income ultimately benefitted all the shareholders of the investment option receiving it. Fidelity did not receive the float or float interest.

The question for the Court: did the use and treatment of the float by Fidelity violate the ERISA fiduciary duty of loyalty to the Plan, on the grounds that Fidelity failed to distribute the float and float interest to the Plan itself instead of the investment options? Here is how the Court answered this question:

The Court said that the issue here is whether the float is a “plan asset”. Although ERISA does not exhaustively define the term “plan assets”, the Secretary of Labor has repeatedly defined “plan assets” consistently with ordinary notions of property rights. Here, the participants failed to adduce any evidence that the Plan had any property rights in the float or float income. To the contrary, the record evidence indicates that, when a contribution was made, Fidelity credited the participant’s Plan account and the Plan became the owner of the shares of the selected investment option–typically shares of a mutual fund–the same day the contribution was received. The Plan received the full benefit of ownership–including any capital gains or dividends from the purchased shares–as of the purchase date. The participants do not rebut Fidelity’s simple assertion that once the Plan became the owner of the shares, it was no longer also owner of the money used to purchase them, which flowed to the investment options through the depository account held for their benefit. Under the evidence and circumstances of this case, the Plan investment options-as opposed to the Plan-held the property rights in the depository float and were entitled to the float income.

The Court concluded that, since neither the float or float income was a Plan assets, Fidelity could not have breached its ERISA fiduciary duties based on the way it handled the float.

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