The First Circuit joined the Eighth Circuit in finding that Fidelity’s practice of earning overnight “float” interest on the cash paid out to 401(k) participants redeeming shares in mutual funds did not violate ERISA’s duty of loyalty or prohibition on self-dealing. In so holding, the Court observed that under the terms of the trust agreements between Fidelity and the plan sponsors of the 401(k) plans, Fidelity acted as an intermediary by: (i) opening and maintaining trust accounts for each plan and participant; (ii) accepting contributions from the participant and employer; (iii) investing those contributions in mutual funds; and (iv) when requested by a participant, withdrawing and distributing participant shares in the mutual fund.
Plaintiffs challenged the final step in Fidelity’s intermediary responsibilities because of the float interest earned between withdrawal and redemption. The float was earned in the following manner:
- Upon request by a participant to withdraw from the plan, their mutual fund shares were redeemed by the mutual fund paying the market value of the shares using an end-of-trading day value.
- Once valued, the participant’s cash was transferred into a “redemption” bank account owned and registered to Fidelity and then transferred into a Fidelity owned interest-bearing account.
- The next day the value of the participant’s mutual fund shares was transferred back to the redemption account and then electronically disbursed to the participant. (A similar process took place for participants receiving paper checks except that interest was earned until the participant cashed the check.)
- The interest earned, the Float, was then deposited back into the mutual fund.
Plaintiffs did not claim a personal stake in the float; indeed the Court noted that plaintiffs were not “short so much as a penny” and had “no direct stake in the plan assets.” Rather, plaintiffs alleged that by returning the float, which they claim was a plan asset, to the mutual fund and not to the 401(k) plan, Fidelity breached its ERISA fiduciary duties. The First Circuit applied ordinary notions of property rights and dismissed plaintiffs’ claims. The Court held that because the cash payout from the redemption does not go to, and was never intended to, the plan it did not become an asset of the plan upon the exchange. The Court also observed that the intermediary actions taken by Fidelity were consistent with ordinary business practices and, more importantly, with the terms of the trust agreement.
The case is In re Fidelity ERISA Float Litig.,No. 15-1445, 2016 U.S. App. LEXIS 12874 (1st Cir. July 13, 2016).