A complaint seeking class-action status was filed Tuesday in US District Court in Boston alleging that Fidelity Management and Research (Fidelity) mishandled interest earned on clients’ retirement accounts, using some of the money to pay unauthorized fees to itself. The suit was filed by a former participant in 401(k) plans of Hewlett-Packard Co., Avanade Inc. (a subsidiary of Accenture), and by a current participant in the Delta Air Lines Inc. 401(k) plan.
The practice alleged by plaintiffs in the lawsuit as a violation of the Employee Retirement Income Securities Act (ERISA) involves Fidelity depositing certain 401(k) plan assets “on an interim basis in interest-bearing accounts before it disbursed monies as directed by the plans’ participants.” “Income earned or derived from the plans’ assets while invested in such accounts is ‘float income’”, the lawsuit says. The complaint further asserts that this float income was an asset of the plans according to ERISA, and that Fidelity used the 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.”
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 before its investment or before it is it cashed by participants is an issue that, until recently, has received little consideration. Last March, however, a federal district court ruled such a practice illegal and ordered a 401(k) plan’s recordkeeper to repay plan participants $1.7 million in float income it had retained over a six-year period (Tussey v. ABB Inc., W.D. Mo., No. 2:06-CV-04305-NKL, 3/31/12). The plaintiffs in that case were current and former employees of ABB, Inc., a manufacturer of power and automatic equipment. The defendants were ABB, Inc., two committees responsible for administering ABB’s 401(k) plans, Fidelity Management Trust Company and Fidelity Management & Research Company and John W. Cutler, Jr. (the Director of the ABB group that served as the staff to the plan investment committee).
Jennifer Engle, a Fidelity spokeswoman, noted the company is appealing the Tussey decision in Missouri and said “we believe that the practices described in this lawsuit are consistent with the law and fair to all parties.” Gregory Y. Porter, an attorney for the plaintiffs in the case filed on Tuesday, estimated Fidelity could be liable for as much as $2 billion in damages, based on the Tussey decision. “On an individual basis, we’re talking about very small amounts, but that’s what class action is for: to right many small wrongs,” Porter said.
Erica Reed is an associate attorney at Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. She is a member of the Business Torts Department of the firm. Her practice focuses primarily upon representing individuals and entities in the areas of securities litigation and arbitration, as well as complex business and antitrust litigation.