401(k) fiduciary lawsuit raises questions on record keeping

A court decision sheds new light on issue of whether float income is a plan asset

Mar 21, 2014 @ 12:28 pm

By Darla Mercado

401(k), fees, schlichter, lawsuit, record keeping, float
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An appellate court's decision this week in a 401(k) fiduciary duty lawsuit is raising questions among legal experts in the retirement plan industry about float income and who it belongs to.

On Wednesday, the 8th U.S. Circuit Court of Appeals backed a lower court's decision that found that ABB Inc. had breached its fiduciary duty to its workers when it failed to monitor its plan record-keeping costs, failed to calculate the amount the plan paid through revenue sharing and failed to determine whether the pricing was competitive.

The court also upheld the lower court's judgment for an award of $13.4 million against ABB with respect to the record keeping.

“This decision is a victory not just for ABB employees, but for all 401(k) employees and retirees,” said Jerome Schlichter, the attorney representing the plan participants in the suit. “That's because it states that plan sponsors have a strict duty to monitor record-keeping costs and make sure they're reasonable.”

The court, however, also reversed the lower court's ruling on other issues, clearing plan record keepers Fidelity Management Trust Co. and Fidelity Management and Research Co. of a breach of fiduciary duty.

The case, Ronald C. Tussey v. ABB Inc., is a landmark suit for the retirement plan industry.

In their initial suit, filed in the U.S. District Court for the Western District of Missouri in Jefferson City in 2006, the participants claimed that the retirement plan was entitled to float income that was generated when plan contributions were made and held briefly in a depository account before being invested. The lower court sided with the participants, but the appellate court subsequently reversed the decision.

Though the appellate court took a strong stance this week confirming the duty of the plan sponsor and fiduciaries to track their record-keeping fees and ensure they are reasonable, it left some ambiguity with respect to how it views float income.

“They said the float belongs to the investment options [in the plan],” said Marcia Wagner, managing director of The Wagner Law Group. “If the plan invests in the investment option, then it is a plan asset.”

“This has created more uncertainty,” she added.

Circuit Court Judge Kermit Edward Bye dissented.

“Unlike the majority, I would conclude that float is a plan asset under these circumstances and Fidelity therefore breached its fiduciary duty of loyalty by transferring float to the depository account for the benefit of investment options and by using float income to pay for bank expenses,” he wrote.

The case raises another interesting issue with respect to float: Whose dollars are generating float income?

In the decision, the judges agreed with Fidelity that when an exiting participant chooses to accept a check, the “funder of the check owns the funds in the checking account until the check is presented and this is entitled to any interest earned on the float.” However, the participants contest the ownership of the funds, claiming that the owner is the plan — and making float income a plan asset.

Expect to see this issue get more attention with respect to participants leaving plans, noted C. Frederick Reish, a partner in the employee benefits and executive compensation practice group at Drinker Biddle Reath.

Record keepers will say that if a participant leaves the plan, then his or her investment is liquidated and turned into cash. That cash is then held into an account, from which the record keeper will write the check.

“The issue with float is: Where did the money that earned the float come from?” said Mr. Reish. “I can see where the dissenting judge may have an argument in the sense that if the money is in the plan, then the plan owns the asset.”

“But is it proper for the record keeper to move the money out of the plan and into a checking account?” he asked. “This is a common practice by record keepers, and that's the remaining issue.”

Vincent Loporchio, a spokesman for Fidelity, said the firm was “pleased” with the appellate court's decision.

Calls to ABB spokesman Barry Dillon were not returned.

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