DC record keepers may face more float income lawsuits

Fidelity's troubles could be just the beginning for record keepers

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DiMeo Schneider's Doug Balsam: "I would believe the door has essentially opened up for more of this activity."

A lawsuit filed against Fidelity Investments by participants in several 401(k) plans might lead to other lawsuits over some record keepers' use of float income.

Former participants in the $14.6 billion 401(k) plans of Hewlett-Packard Co. and the $109 million plan of Avanade Inc., a subsidiary of Accenture PLC, as well as an active participant in the $9.7 billion 401(k) plan of Delta Air Lines Inc., have alleged that Fidelity violated the Employee Retirement Income Security Act in its use of float income.

Float income is money earned from interest-bearing accounts used temporarily by 401(k) plans before plan assets are disbursed when participants move assets among investment options.

While the deposits are made for as short a period as overnight, interest earned can add up to millions of dollars per plan over several years.

The suit, filed Feb. 5 in U.S. District Court in Boston, alleges Fidelity “used float income to pay itself trust and record-keeping fees above and beyond the fees authorized in the trust agreements between the plans and Fidelity,” and remitted float income into investment options without crediting that amount to participants' contributions, according to court documents.

The lawsuit follows a decision in March 2012 in Tussey vs. ABB Inc. by U.S. Circuit Judge Nanette K. Laughrey in the Western District of Missouri.

She ruled Fidelity “breached its fiduciary duties by failing to distribute float income solely for the interest of the plan.” In that case, participants in a 401(k) plan sponsored by Cary, N.C.-based ABB sued ABB, Fidelity and John W. Cutler Jr., the head of ABB's pension and thrift management group.

Fidelity was required to compensate the plan $1.7 million for lost float income.

The decision is notable in an industry where pretrial settlements are the norm. It has prompted heightened scrutiny among plan executives, record keepers and consultants regarding indirect fees and compensation that could lead to other lawsuits.

“It would be naive to think there would not be other potential lawsuits on the horizon and lawsuits against other providers who may have employed the same administrative process,” said Doug Balsam, Chicago-based principal at DiMeo Schneider and Associates. “I would believe the door has essentially opened up for more of this activity.”

“There's going to be heightened scrutiny of the issue,” said Martha Spano, Los Angeles-based principal in investment consulting at Buck Consultants Inc. “They've sort of got a foundation for this. If it isn't Fidelity, it might be another vendor.”

Didn't follow pattern

Lori Lucas, Chicago-based executive vice president and defined contribution practice leader for investment consultant Callan Associates Inc., said, “I think that ABB was an unusual fee lawsuit.

“It didn't follow the pattern of the others and raises some new awareness of different types of areas that plan sponsors hadn't seen in other lawsuits. Any time that happens, that's going to be a wake-up call.”

Tussey vs. ABB Inc. was filed at the end of 2006, a year that saw at least eight fee-related class-action lawsuits, primarily covering revenue sharing.

“Given what interest rates are now, more times than not (there aren't) any substantial findings, but it definitely needs to be on the radar, especially for larger or jumbo plans,” said Jennifer Flodin, Chicago-based managing partner at consultant Plan Sponsor Advisors.

“I think the question of transparency and sort of where all the revenue is going has definitely been coming up increasingly” since the 2012 ruling, said Alison Borland, Lincolnshire, Ill.-based vice president of retirement solutions and strategies at Aon Hewitt.

Aon Hewitt is an unbundled provider that doesn't offer investment options and does not encounter the question of float income. Still, the ABB decision made clients more aware of revenue flows, according to Ms. Borland.

“Our clients are very much more and more saying "Help us make sure we understand all the revenue flows from our plan. Let's look at the structure of how the fees are paid and whether it's as fair as it should be and could be,” said Ms. Borland.

Robert Liberto, New York-based senior vice president at Segal Rogerscasey, said contracts for his firm's clients are often negotiated to get float income returned to plan participants to reduce record-keeping fees.

“The money that (record keepers) receive (on each float) is very small, unlike years ago,” said Mr. Liberto, but with very large clients, “we know there's millions of dollars out there at any given time.”

Mr. Liberto said clients mention the float issue far more since the ABB decision. “Float just came up last night in a conversation, and we're actually going to be talking to the client today about it,” he said last week.

First addressed in 2004

How record keepers use and report float income was first addressed in November 2004, when the Department of Labor established guidelines for disclosing earnings from float income in its Field Assistance Bulletin 2002-03.

The bulletin stated “float should be regarded by plan fiduciaries and service providers as part of the service provider's compensation for services to the plan,” and that the service provider was required to disclose all the circumstances under which it received float income.

Fidelity is appealing the ABB decision. “Fidelity operates with the best interests of clients and customers as our top priority. Our practices are in compliance with ERISA and DOL guidelines,” Fidelity spokeswoman Jennifer Engle wrote in an e-mail response.

“Fidelity respectfully disagreed with the only finding against us, a technical violation that resulted in a monetary award of less than one-half of one percent of the total damages sought by the plaintiffs. We believe the ruling was in error and it is being appealed. All of the other claims made against Fidelity in the case were rejected by the court,” Ms. Engle wrote.

Ms. Engle said the practices to which the new, Feb. 5 suit refers “are consistent with the law and fair to all parties ...”

Reporter Robert Steyer contributed to this story.

This article originally appeared in the February 18, 2013 print issue as, "More float income lawsuits predicted".