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Fidelity Prevails In ERISA Float Litigation

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).

© 2020 Proskauer Rose LLP. National Law Review, Volume VI, Number 211

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About this Author

Robert Rachal, Employment Attorney, Proskauer Rose Law Firm
Senior Counsel

Robert Rachal's work focuses on complex ERISA litigation, and he also advises employers on ERISA benefit and fiduciary issues. Robert has assisted clients in the defense of numerous class actions under ERISA. 

504.310.4081
Tulio D. Chirinos, Labor, Employment, Attorney, Proskauer, Law firm
Associate

Tulio D. Chirinos is an Associate in the Labor & Employment Department, and a member of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center, resident in the New Orleans office.

Tulio works on a wide variety of employment law and benefit matters, including Title VII of the Civil Rights Act, the Fair Labor Standards Act, ERISA breach of fiduciary duty claims, and ERISA benefits claims. He is also a contributing author to Chapter 20 of the fifth edition of BNA’s ERISA Litigation treatise, which will be published in 2014. Prior to joining Proskauer, Tulio clerked for the Federal Public Defender’s office for the Middle District of Florida. Before attending law school, Tulio was an officer in the Army National Guard, where he served two tours of duty in Iraq. He is currently a Captain in the Mississippi National Guard.

504-310-2048