The next wave of litigation against 401(k) providers has arrived, with Fidelity Investments facing 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 April 25 in U.S. District Court in Massachusetts against Fidelity Management and Research Co. and Fidelity Investments Institutional Operations Co. Inc. She is seeking class 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 are placed temporarily in interest-bearing accounts — into Fidelity funds that were in the plan menu.
Fiduciary duty
Meanwhile, Fidelity Institutional Operations allegedly breached its fiduciary duty by using the float income, which she claims is a plan asset, to cover operating expenses.
The complaint also states that the two Fidelity 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 contends that the firm participated in self-dealing in violation of the Employee Retirement Income Security Act of 1974.
“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.”
More cases likely will pop up, she said.
Many institutions hold float money, and many probably commit prohibited transactions. “People are seeing more,” Ms. Wagner said.
“They're understanding how these institutions operate,” she said. “And they're saying ... that it's grossly unfair.”
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 record-keeping 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 and ABB $35.2 million to cover participants' losses. ABB and Fidelity are appealing.
Fidelity's argument on float income, which was laid out in 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 plans for which Fidelity acts as record keeper. All this happens before the money is transferred the following day to mutual fund companies' accounts, according to Fidelity's brief.
