Use of Float Income Questioned in New Fidelity Lawsuit

A new proposed class action lawsuit filed in the U.S. District Court for the Northern District of California, San Jose Division, accuses Fidelity of improperly handling “float income” that plaintiffs feel should be considered a plan asset and thus returned to plan accounts.

It was just last month that the 1st U.S. Circuit Court of Appeals ruled that float income Fidelity retained in the process of making distributions to retirement plan participants is not a plan asset, so Fidelity did not violate its fiduciary duties under the Employee Retirement Income Security Act (ERISA) in keeping certain amounts of the float. That ruling has clearly not deterred plaintiffs standing behind this new complaint, which levels many of the same allegations against Fidelity—only this time in the interest of employees of HP Inc. and United Airlines.

The retirement plans in question are defined contribution (DC)-style plans known as the HP Plan and the UAL Ground Plan, qualified and defined under ERISA Section 3(34), 29 USC § 1003(34). Case documents show both plans are quite sizable: For calendar year 2012, the HP Plan received cash contributions of more than $1 billion, and approximately $20 million in participant loan repayments, as reported on the plan’s annual return on Form 5500. During 2012, the HP Plan made benefit payments and other payments to participants or beneficiaries, including direct rollovers, of $1.95 billion.

The UAL Ground Plan is invested through a master trust arrangement and all of the assets of the UAL Ground Plan, along with all the assets of the United Airlines Flight Attendant 401(k) Plan and the United Airlines Management and Administrative 401(k) Plan (referred to collectively in the lawsuit as the “UAL Plans”) are held in the United Airlines, Inc. 401(k) Plans Master Trust (the UAL Master Trust). For calendar year 2012, the UAL Master Trust received cash contributions of $255 million as reported on the UAL Plans’ Annual Returns on Form 5500. During 2012, all payments, rollovers and distributions clocked in at $314 million.

Fidelity is the target of the lawsuit because the Fidelity Management Trust Company (FMTC) serves as the Trustee for the UAL Master Trust and served as Trustee for the HP Plan during most of the relevant period until January 2, 2013, and Fidelity Investments Institutional Operations Company (FIIOC) still serves as the HP Plan’s recordkeeper. In short, these providers are accused of improperly keeping certain amounts of “float income” generated by plan assets as they were held in transit between accounts during the daily processing of the contributions and distributions already described.

NEXT: Examining the allegations 

Plaintiffs argue that, in large plans like the HP Plan and the UAL Master Trust, there are hundreds if not thousands of transactions occurring on a daily basis that require a transfer of cash. For simplicity and operational efficiency, all of these cash transactions are managed through an omnibus account that, for purposes of the complaint, is referred to as the “cash management account” or CMA.

It is over the ownership and rightful claim to interest payments and other monetary returns credited to the CMA that the participants filed suit: “From a legal, financial accounting, and logical perspective, all of the cash generated as a result of plan operations—employer and employee contributions, loan repayments and sales of securities owned by a plan—should belong to the plan and be held in trust by or for the benefit of the plan. Cash contributions to qualified retirement plans, such as the HP and UAL Plans, clearly become plan assets when deposited into trust.”

According to plaintiffs, when those plan assets are used to purchase investment securities, including mutual funds shares, securities held in separately managed accounts and interests in collective investment trusts, those investments are plan assets and are registered in the name of the plan’s trust. When those investments are liquidated to provide cash for distributions, loans and withdrawals to participants, the cash received by the plans, or by Fidelity as trustee for the plans, should also be considered a plan asset, plaintiffs argue.

Fidelity sees things another way, claiming returns on certain CMA assets as its own. From the text of the complaint: “As trustee and fiduciary to the HP and UAL Plans and the putative Float Plans Class and HP and UAL Plan Participant Class, manages the cash generated by its qualified retirement plan customers. After the cash generated by a plan transaction is credited to the account of the plan, Fidelity effectively withdraws that cash from the plan and deposits that cash into an account maintained in the name of or for the benefit of Fidelity, and Fidelity uses that cash for its own benefit or for its own account.”

Plaintiffs argue this practice stands in violation of fiduciary obligations under Section 404 and the prohibited transaction rules of Section 406 of ERISA, 29 USC §§ 1104 and 1106.

NEXT: Evidence and argumentation 

The text of the complaint offers some interesting insight into the operation of the retirement plans in question, as well as how Fidelity fields and processes client requests for trades, contributions, distributions, etc.

According to the complaint, during 2012, the HP Plan received more than $1.1 billion in cash contributions and loan repayments. “Because buy and sell orders for plan investments are netted against each other, it is reasonable to assume that a significant amount of the $1.945 billion in cash needed for HP Plan distributions was derived from contributions and loan repayments,” plaintiffs allege. “The UAL Master Trust, similarly, received $255 million in cash contributions during the 2012 plan year and paid out $314 million is distributions. It is, therefore, reasonable to assume that a significant amount of the $314 million in cash needed for UAL Plan distributions was derived from contributions and loan repayments.”

The calculations get more complicated when participants have taken loans form the plan and are repaying those loans through additional monthly payroll deduction contributions, plaintiffs admit, but even if “only 50% of that $2.25 billion in cash distributions made from the HP Plan and UAL Master Trust was 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 Plans 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 … Likewise, 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 Plans.”

Plaintiffs go on to conclude in their complaint that Fidelity “(i) invests the cash generated by plan operations and retains all the earnings with respect to those investments, and (ii) uses that cash for other operational purposes, effectively reaping the benefits of an interest-free loan from all of its plan customers.”

The full text of the compliant is available online here.