8th Cir. Clarifies 401(k) Float Income Ownership, Fiduciary Duties

By Aditi Mukherji, JD on March 27, 2014 | Last updated on March 21, 2019

The Eighth Circuit recently issued a decision in a 401(k) fiduciary lawsuit that is raising questions about "float income" -- interest earned from plan assets.

At issue is the handling of funds that flow into and out of 401(k) plans and the question of who profits from the float income generated while the money is held by a service provider -- in this case, Fidelity Investments -- before its investment or before it is it cashed by participants.

If you're in the retirement plan industry, you might want to take a look at the court's decision in Ronald C. Tussey v. ABB Inc.

Fiduciary Duty

In the case, the three-member panel affirmed a lower court's decision that held ABB Inc. had breached its fiduciary duty to its workers when it failed to monitor its plan record-keeping costs with Fidelity, failed to calculate the amount the plan paid to Fidelity through revenue sharing, and failed to determine whether Fidelity's pricing was competitive.

Handing a victory to 401(k) employees and retirees, the court also kept in place the $13.4 award against ABB for its improper record-keeping.

"This decision [...] states that plan sponsors have a strict duty to monitor record-keeping costs and make sure they're reasonable," said Jerome Schlichter, the attorney representing the plan participants in the suit, according to InvestmentNews.

However, the panel found no breach of fiduciary by Fidelity, the service provider who served as a record keeper and trustee. Plan participants claimed it violated its fiduciary duty by causing ABB employees and retirees to pay excessive fees in their 401(k) plan. But the panel found no wrongdoing in Fidelity's float rate.

Float Income

Though the panel took a strong stance on recordkeeping, it created some wriggle room on the issue of float income ownership. Essentially, the panel ruled that the float belongs to the investment options in the plan. If the plan invests in the investment option, then it is a plan asset, according to RIABiz.

Another big question: Whose money is generating the float income?

The panel sided with Fidelity and held when an exiting participant chooses to accept a check, the "funder of the check owns the funds in the checking account until the check is presented and this is entitled to any interest earned on the float." However, the participants contested the ownership of the funds, claiming that the owner is the plan, making float income a plan asset. But the panel didn't buy the argument.

This will become a pressing issue when participants leave plans. One of the main remaining issues is whether it's proper for the record keeper to move the money out of the plan and into a checking account -- a common practice by record keepers.

It's worth going over these issues with clients, including plan sponsors, plan participants, and possibly even plan members' spouses.

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