Float Resurfaces as a 401(k) Litigation Point

By Nevin Adams • August 23, 2016 • 0 Comments
A plan trustee and recordkeeper — and a couple of large employers — have been sued for allegedly misusing the float income generated by their plans.

The suit, filed in the U.S. District Court for the Northern District of California, challenges the plan fiduciaries of the Hewlett-Packard Company 401(k) Plan and United Airlines Ground Employee 401(k) Plan for their role in allowing Fidelity Management Trust Company (the plans’ trustee) and Fidelity Investments Institutional Operations Company (the recordkeeper) in the disposition of so-called “float” income related to cash transactions of the plans.

Citing volumes of cash flows from distributions and contributions, the suit claims that if only half of the $2.25 billion in cash distributions made from the HP Plan and UAL Master Trust had been distributed to participants by check, Fidelity would have had the use of $1.125 billion in cash generated by the HP Plan and the UAL Plan for an average of 22 days during 2012, and the unrestricted use of the other $1.125 billion transferred by EFT for a period of at least two days. Moreover, the suit claims that during 2012 alone, Fidelity earned interest on the overnight investment of $1.13 billion in contributions to the HP Plan and $255 million to the UAL Plan.

The suit claims that Fidelity “diverted” part of the trust — the cash contributions to the plans and the proceeds of the sale of plan assets — “for a purpose other than the exclusive benefit of the participants in the Plans,” noting that this “diversion had no purpose other than to benefit Fidelity,” going on to state that there “is no reason why a contribution account or disbursement account cannot be maintained in the name of or for the benefit of the Plans and their participants.” The suit describes the process as being “the equivalent of a bank taking money out of a customer’s checking account as soon as, if not before, the check is actually written rather than when the check is presented for payment.”

Previous Rulings

It’s not the first time that the issue of the utilization of “float” has been raised, or that Fidelity has been accused of misappropriating those funds. More than a year ago, the U.S. District Court for the District of Massachusetts dismissed retirement plan participant claims that Fidelity violated ERISA by keeping or improperly using “float income” generated by their plans. In that instance, the plaintiffs in four separate suits that had been consolidated alleged that if float was a plan asset, then Fidelity breached its fiduciary duties and committed a prohibited transaction by keeping this float income for its own benefit. However, applying ordinary notions of property rights, the District Court held that float income was not a plan asset.

In that case, the plaintiffs argued that the plans’ ownership of shares in the mutual funds made the plans the “beneficial” owners of the funds transferred to handle the withdrawal requests from these funds. However, applying ordinary notions of property rights, the district court disagreed, explaining that nothing in the plan documents changed mutual fund assets into plan assets simply because they were transferred to an account from which they would be distributed to participants. The court acknowledged that this could have been provided for in the plan documents but was not, and distinguished this from a case in which disbursements had been made contrary to the plan documents.

Will it Be Precedent?

In the latest case, the plaintiffs assert that Section 3 of the trust agreement provides that: “Except as provided by applicable law, no part of the Trust may be used for, or diverted to, purposes other than the exclusive benefit of the Participants in the Plan or their beneficiaries or the reasonable expenses of Plan Administration, and that Pursuant to Section 2 of the Trust Agreement between HP and Fidelity Trust (the ‘Trust Agreement’).” In the case of Hewlett-Packard, Section 2 of its Trust Agreement provides that “[t]he Trust shall consist of an initial contribution of money or other property, all investments made therewith [and all proceeds thereof, and all earnings and profits thereof] less payments that are made by the Trustee as provided herein.”

What remains to be seen is whether this court, with these facts, will come to a different conclusion.