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.”