Fidelity Win Highlights Ways Companies Profit From 401(k)s

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By Jacklyn Wille

July 14 — Fidelity Management Trust Co. and other financial institutions that use creative ways to make money off employee benefit plans have found an increasingly loyal ally in the U.S. Court of Appeals for the First Circuit.

On July 13, the First Circuit upheld Fidelity's controversial practice of keeping “float” income earned off of 401(k) accounts. This practice allows Fidelity to pocket interest earned when a 401(k) investor requests a distribution of his or her benefits, and the distribution is held temporarily in an overnight account, according to court filings.

A group of 401(k) investors challenged this practice as a breach of duty in violation of federal law. In their view, this interest is a "plan asset" under the Employee Retirement Income Security Act that rightfully belongs to them. The Department of Labor has argued that float income belongs to individual participants regardless of whether it qualifies as a plan asset.

In rejecting these challenges to Fidelity's practices, the First Circuit relied on two earlier decisions it issued in favor of Unum Life Insurance Co. of America and Sun Life Assurance Co. of Canada. In those cases, the First Circuit blessed the insurers' practice of earning interest off of life insurance payouts held in checkbook-style accounts. Insurance beneficiaries raised similar objections to these practices.

‘Plan Assets.'

The theory driving each of these decisions is that the interest earned by the financial company doesn't qualify as a “plan asset” under ERISA. If the interest isn't a plan asset, the companies can't be liable under federal law for pocketing that interest rather than sharing it with the plan participants whose accounts helped generate it.

Michael A. Wolff, an attorney with Schlichter Bogard & Denton LLP who has represented investors bringing similar claims against financial institutions, called the First Circuit's decision in favor of Fidelity “incorrect,” adding that it was “premised on the belief that since the plan fiduciaries apparently allowed Fidelity to retain this float, it somehow ceased to become a plan asset.”

“Plan fiduciaries should be prepared to explain why they are allowing Fidelity (or any similar custodian of plan assets) to keep the interest it earns off this float, instead of collecting that interest for their plan, and what the plan is getting in return for giving up this asset,” Wolff told Bloomberg BNA in a July 14 e-mail.

Despite upholding Fidelity's float practices from the current legal challenges—which were rooted in the idea of “plan assets”—the First Circuit left open the possibility that another case might be able to successfully challenge similar float practices without claiming that float qualifies as a plan asset.

Byrne J. Decker, an attorney with Pierce Atwood LLP who successfully defended Unum's checkbook payments before the First Circuit, said the decision in favor of Fidelity “correctly reaffirms” the principles articulated in the earlier cases involving Unum and Sun Life.

“So, in the absence of plan provisions that give ‘the plan' an ownership interests in particular funds, and where the fiduciary follows the plan terms and delivers to beneficiaries all of the promised benefits, no ‘plan assets' are involved and no fiduciary duties are breached,” Decker told Bloomberg BNA in a July 14 e-mail.

"Maintaining the focus on the terms of the plan furthers Congress’ intent not to discourage employers from adopting plans in the first place," he added.

Not ‘So Much as a Penny.'

The First Circuit's opinion also focused on the fact that none of the 401(k) investors suing Fidelity claimed to have been denied any of their retirement benefits.

“They do not allege that they are or will be short so much as a penny of any benefit to which they are entitled under the terms of their plan,” the court wrote.

Robert W. Rachal, a defense-side ERISA attorney with Proskauer Rose LLP in New Orleans, said that this language from the opinion raised a question the court never addressed—namely, whether the investors had standing to challenge conduct that caused them no clear losses.

“There's a real battle going on about standing throughout ERISA, and whether or not a participant actually suffered a constitutionally required injury-in-fact,” Rachal told Bloomberg BNA July 14.

Rachal said that although the court didn't decide the case on standing grounds, “certainly those concepts of whether anyone suffered any injury influenced the decision.”

Financial Company Victories

The First Circuit isn't the only court to have upheld these types of practices in the face of ERISA challenges. Most notably, the U.S. Court of Appeals for the Eighth Circuit issued a 2014 decision affirming the very Fidelity practices at issue in the First Circuit case.

Other appellate courts have affirmed the life insurance checkbook practices of Metropolitan Life Insurance Co. and Lincoln National Life Insurance Co.

Despite multiple requests, the U.S. Supreme Court has expressed no interest in addressing these questions. It declined to hear appeals in both the Lincoln National and Unum cases.

Company Response

Fidelity spokesman Steve Austin praised the First Circuit decision.

“We are very pleased with the court's decision and look forward to continue providing valuable services to people who are saving for retirement at work,” Austin told Bloomberg BNA July 14.

The First Circuit's decision was written by former Supreme Court Justice David H. Souter and joined by Judges O. Rogeriee Thompson and William J. Kayatta Jr.

Before being appointed to the bench, Kayatta represented Unum in the lawsuit challenging its checkbook payments that ultimately resulted in a First Circuit victory.

The 401(k) participants were variously represented by: Agrawal Evans LLP; Peiffer Rosca Abdullah & Carr LC; Levin Papantonio Thomas Mitchell Rafferty & Proctor PA; Frankowski Firm; Schneider Wallace Cottrell Konecky Wotkyns LLP; Bonnett Fairbourn Friedman & Balint PC; Fishman Haygood Phelps Walmsley Willis & Swanson; Bailey & Glasser LLP; Robinson & Cole LLP; Izard Nobel LLP; and Shapiro Haber & Urmy LLP.

Fidelity was represented by O'Melveny & Myers LLP and Goodwin Procter LLP.

To contact the reporter on this story: Jacklyn Wille in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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