The next wave of litigation against 401(k) providers has arrived, as
Fidelity Investments faces yet another lawsuit tied to the company's handling of money generated from plan assets.
Korine Brown, a participant in General Motors Inc.'s Personal Savings Plan for hourly workers, filed a suit last Thursday in the U.S. District Court in Massachusetts against Fidelity Management and Research Co. and
Fidelity Investments Institutional Operations Co. Inc. She is seeking class action status on the behalf of the participants in the plan, which, as of the end of 2011, held some $46 billion in assets for more than 100,000 account holders.
In her suit, Ms. Brown alleges that Fidelity Research breached fiduciary duties to the retirement plan when it invested float income — money generated from contributions, redemptions and transfers of plan assets when they're placed temporarily in interest-bearing accounts — into Fidelity funds that were in the plan menu.
Meanwhile, Fidelity Institutional Operations allegedly breached its fiduciary duty by using the float income, which Ms. Brown claims is a plan asset, to cover operating expenses.
The complaint also states the two Fidelity's units held a fiduciary obligation because both had discretion over plan assets. Instead of reinvesting the float income into its own funds or using the money to foot costs, Fidelity should have transferred the money to the plan, Ms. Brown claims. Instead, she says the firm participated in self-dealing in violation of the Employee Retirement Income Security Act of 1974.
The suit also alleges that Fidelity's use of the float income wasn't disclosed to the plan participants or to the fiduciaries who were responsible for the administration of the plan, and that such disclosure in fact, was not permitted under the plan's contracts with Fidelity.
“Our practices are in compliance with [Department of Labor] ERISA guidelines,” said Jenny Engle, a spokeswoman for Fidelity. “We did not retain any float income or earn any fees from managing the float.”
Ms. Brown's case is the latest in a slew of suits connected to the float income of Fidelity 401(k)s.
“This has been nothing new,” said Marcia Wagner, managing director at The Wagner Law Group PC. “If plan assets are waiting for investment or distribution, then the institution really should be providing interest on that to the plan.”
She noted that while Fidelity naturally attracts litigation because of its size in the 401(k) market, the matter of how float income is treated affects many providers. More cases will likely pop up. “Many institutions hold float money, and many probably commit prohibited transactions,” Ms. Wagner said. “People are seeing more. They're understanding how these institutions operate. And they're saying ... that it's grossly unfair.”
Tort attorneys are also becoming better versed on retirement products, which means they'll be trolling for bigger cases.
“I think the tort bar is looking for the next big lawsuit, the next area where they can look for consumer protection,” Ms. Wagner said. “These aren't frivolous lawsuits. They're going to stick, and I think they'll proliferate.”
Fidelity has been hit with a number of float-income suits ever since a federal judge in Missouri ruled in March 2012 that retirement plan giant ABB Inc. breached fiduciary duty when Fidelity used float income to pay bank fees. ABB, meanwhile, should have monitored recordkeeping costs and negotiated rebates on the behalf of the retirement plan, according to the judge's opinion.
In that case, Fidelity was ordered to pay $1.7 million, ABB $35.2 million to cover participants' losses. ABB and Fidelity are appealing the decision.
Fidelity's argument on float income, which was laid out a a brief filed in the appeal of the ABB decision, is that if a participant makes a timely trade and it settles at market close that day, then the participant's account receives all the benefits of share ownership as of that day. Administrative work takes place overnight, however, to determine where to direct the money in all of Fidelity's recordkept plans, and all this happens before the money is transferred the following day to mutual fund companies' accounts, according to Fidelity's brief.
During the intermediate period prior to the next-day transfer to the fund companies' accounts, Fidelity places the money into a depository account overnight and invests it in repurchase agreements. The next day the principal goes back to the depository account and is then transferred to the mutual fund companies' accounts. Income generated during the overnight investment is then used to cover banking fees for float accounts. Anything left over is allocated to the investment options in proportion to their share of the overnight account balance, Fidelity claims in the brief.
Similarly, when participants make withdrawals, a trade takes place on that date and the money is then held at a redemption account where Fidelity calculates and withholds the appropriate taxes. Participants don't collect additional amount for interest or overnight investment income; they just get the face value of the check when they cash it, as is common practice in banking, the brief states.
“Float was not a plan asset, and thus Fidelity was not required to credit the plan with income earned on overnight investments of float,” according to the company's brief. “It is undisputed that Fidelity was paid nothing for the float process: it received no fees for managing the float and it received none of the float earnings.”
