In re Fid. ERISA Float Litig., 829 F.3d 55 (1st Cir. 2016), held that Fidelity did not breach fiduciary duties to the plans at issue by allegedly earning interest on cash on its way to participants after a redemption had been made. The case involved a number of 401(k) plans that had hired Fidelity as trustee to act as intermediary between the plans, the participants and the mutual funds in which the participants’ funds were invested. In a nutshell, when a participant desired to make a withdrawal, the mutual fund would sell the shares and transfer the cash to Fidelity; Fidelity held the cash at least overnight in an account that allegedly earned interest for Fidelity; and it then distributed the cash to the participant. The plaintiffs, various participants and one plan administrator, sued on behalf of the plans.
The First Circuit observed that the distribution method was cumbersome and that Fidelity’s role as intermediary could be eliminated from the process if the funds paid participants directly, but it found “nothing bizarre about this sequence as a matter of ordinary business practice, and plaintiffs do not contend otherwise.”
The court then held that Fidelity clearly was a fiduciary, because it exercised authority or control respecting disposition of plan assets. However, Fidelity did not breach its fiduciary duty because the cash on which it allegedly earned interest for its own account was not a plan asset. The court rejected the notion that, because the mutual fund shares were plan assets, the cash proceeds of the sale of those shares necessarily remained plan assets. This was because “[t]he payout from the redemption does not go, and is not intended to go, to the plan itself. In fact, it appears that the plans are not entitled to hold uninvested cash[.]”Accordingly, the “plan’s instruction to redeem shares is therefore most coherently seen as an order to pay the participant, whose receipt of the dollar value of the shares is as clearly the object of the transfer scheme as it would be if the mutual fund were to pay the participant directly.” There was no question that the participants received every penny of sale proceeds, and the plaintiffs did not claim they should have been paid the interest.
Significantly, the court held that Fidelity’s fiduciary relationship with the plan “standing alone, is not a sufficient reason to think that it confers plan-asset status on everything that comes within Fidelity’s possession.”
As further support for its decision, the court explained that a fiduciary like Fidelity must act in accordance with plan documents, and the plan documents here “confirm … that Fidelity’s duty is to make a distribution by a route incapable of providing any benefit to the plan from temporary use of the cash.” Because the cash cannot go to, or benefit the plan, it cannot be a plan asset.
The court also noted the parallels between this case and its prior decisions upholding the use of retained asset accounts by insurance companies paying out life insurance benefits. Vander Luitgaren v. Sun Life Assur. Co. of Can., 765 F.3d 59 (1st Cir. 2014); Merrimon v. Unum Life Ins. Co. of Am., 758 F.3d 46 (1st Cir. 2014). The court held: “it is in harmony with those cases that we reject the comparable argument in this one, too. Cash held by a mutual fund is not transmuted into a plan asset when it is received by an intermediary whose obligation is to transfer it directly to a participant.”
Finally, the court dealt with an amicus argument raised by the Department of Labor, which asserted that Fidelity breached its fiduciary duties by not seeking the plans’ permission to use the float to earn interest for itself. The court found that the plaintiffs had not raised this argument, and it declined to consider it. However, the court agreed to “reserve the issue for timely presentment in another case.”