Free Floating: Understanding ERISA Requirements Regarding Float Income Derived from Plan Assets

By Thomas Lamb, Albany Government Law Review

ERISA’s Standard for Fiduciaries

In December of 1963, the Studebaker-Packard Corporation shut down its plant in South Bend, Indiana, giving rise to one of the most “glorious stor[ies] of failure in business.”[1]  At the time of the plant’s closing, the pension fund for hourly workers was about as broke as the rest of the company.[2]  Participants enrolled in Studebaker-Packard’s retirement plan whose benefits had vested received their full pension; but the plan did not have enough funds to honor what it had promised younger participants whose benefits had not yet vested.  “Some received a lump-sum payment worth a fraction of the pension they expected, and others got nothing at all.”[3]  Thousands of employees were left without compensation for years of contributions, and also without a legal remedy.

Eleven years later, in part as a response to the Studebaker-Packard catastrophe, the 93rd United States Congress enacted the Employmee Retirement Income Security Act (hereinafter “ERISA”).  This act sought to:

[P]rotect . . . the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information . . . , by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and . . . access to the Federal courts.[4]

One of the ways that ERISA protects the interests of participants in employee benefit plans is by requiring that fiduciaries in qualified retirement plans abide by the duties of prudence and loyalty.  ERISA requires a fiduciary to:

[D]ischarge its duties . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims [in accordance with the plan documents].[5]

Furthermore, “the duty of loyalty requires a fiduciary to: discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of:  (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.”[6]  This standard requires that all assets—such as interest on retirement plan accounts—be used for providing benefits to participants and their beneficiaries or defraying reasonable expenses of administering the plan.

In Tussey v. ABB Inc.,[7] the United States District Court for the Western District of Missouri provided guidance as to how these two standards apply to a particular type of interest known as “float income.”  In doing so, the court presented an interesting question to corporate America.  How will fiduciaries be expected to handle float income in the future?

What is Float?

Float income is the “interest earned when contributions and disbursements are held temporarily in overnight accounts or disbursement accounts[.]”[8]  In Tussey, the court describes the process by which Fidelity acquires float income while acting as the fiduciary for the 401k plan offered by ABB Inc.  Simply put, when disbursements are triggered in a 401k plan, funds are transferred from participants individual plan accounts and placed in a disbursement account.  The assets in this disbursement account generate interest until the checks that the participants receive are deposited.[9]  When the amount of money kept in these disbursement accounts is very low, the interest itself may be too small to measure.  However, the amount of money held in these disbursement accounts can create substantial interest.  For example, in Tussey, the court found that Fidelity’s failure to appropriately distribute the float income resulted in $1.7 Million in damages to plan participants. [10]

In Tussey, the court ruled that Fidelity had breached their fiduciary duties (as outlined above) when they failed to allocate float income exclusively for the interest of the plans. [11]  Fidelity was a fiduciary to the plan by virtue of their discretionary power over the float income, and they “had improperly exercised that fiduciary authority to use float income for its own benefit and that of other parties.”[12]  Fidelity was attributing the interest to investment options, not the plan itself.   Given that float income was considered part of the plan assets, Fidelity’s decision to allocate float income to investment options, and to use the float income to cover bank expenses (which Fidelity should have paid for), was a breach of their fiduciary duty to plan participants.[13]

Handling Float in the Future

The Tussey decision has provided an important lesson to corporate America.  Any provider with discretion over plan funds cannot use plan assets to increase its own compensation for administering the plan.  However, the remedy to this issue lies in disclosure.  As ERISA’s intent lies in “requiring the disclosure and reporting to participants and beneficiaries of financial and other information[,]”[14] the Department of Labor has indicated “the service provider may avoid prohibited transactions in this context by following these steps:

  • Disclose, to the responsible plan fiduciary, the circumstances under which float will be earned and retained;
  • For float on contributions pending investment, disclose and stick to established time frames for when investment will occur;
  • For float on distribution checks, disclose when the float period begins (e.g., the date check is written) and ends (e.g., when the check is deposited), including time frames for mailing and other practices that might affect the float period; and
  • Disclose the rate of the float or the manner it will be determined.”[15]

For the majority of plan participants, where float income is directed will have virtually no effect on their decision to enroll in a particular plan.  Therefore, disclosure is a very inexpensive way to avoid costly litigation.  Unfortunately, it is not a comprehensive solution.  This is because “any service arrangement that is not “reasonable” under ERISA Section 408(b)(2), or that pays a provider more than reasonable compensation, will likewise result in a prohibited transaction.”[16]  The conclusion that can be reached here is that for small corporations, where float income is a nominal amount, float income can be used for the plan provider’s or the fiduciary’s benefit.  However, for large corporations where the income derived from float income can amount to millions of dollars, a court would be more likely to find a similar service agreement unreasonable.

Since payment of bank fees has been found to be a prohibited transaction, plan providers and fiduciaries must be mindful of where float income is allocated in the future.  Based on this examination and the Tussey ruling, I would submit that corporations use float income only for the purpose of “defraying reasonable expenses of administering the plan.”[17]  An example of how a large corporation could accomplish this would be to arrange for a service agreement where the fiduciary managing the plans investment options either accept a hard dollar fee for management or a combination of float income and a lesser hard dollar fee.  In the first instance, the float income could be distributed pro rata to plan participants, and in the second situation, it could be used to defray costs of administration.

Regardless of how corporations handle the allocation of float income, this is an issue which plan administrators, providers, and fiduciaries must pay close attention to as it develops.  I would predict that in the coming years, this issue will be heard in New York State’s Appellate Division courts.   There is no bright line rule as to what is “reasonable” under ERISA, and it is certain that corporations handling float income will continue to test what constitutes a reasonable service agreement.

[1] James A. Wooten, The Most Glorious Story of Failure in the Business: The Studebaker-Packard Corporation and the Origins of ERISA, 49 Buff. L. Rev. 683, 683 (2001) (discussing the origins of ERISA).

[2] Id. at 684.

[3] Id.

[4] 29 U.S.C. § 1001(b) (2012).

[5] Tussey v. ABB, Inc., 2:06-CV-04305-NKL, 2012 WL 1113291 at *6 (W.D. Mo., 2012) amended in part sub nom. Tussey v. ABB Inc., 06-4305-CV-C-NKL, 2012 WL 2368471 (W.D. Mo., 2012).

[6] Id.

[7] Supra note 5 (giving reporter citation).

[8] Eleanor Banister & James P. Cowles, Compensation and Benefits Insights, JD Supra, (May 29, 2012),

[9] Tussey, 2012 WL 1113291 at *33.

[10] Id. at *40.

[11] Id. at *35.

[12] Joshua J. Waldbeser, United States: Handling Float Income, Mondaq, (Aug. 9, 2012), (discussing Tussey).

[13] See Tussey, 2012 WL 1113291 at *33 (explaining Fidelity’s disbursement process for plan income).  The court summarized the disbursement process as follows:

[W]hen disbursements of PRISM Plan assets are triggered, they are received by participants after the following process: 1) The day after disbursements are triggered, funds move from their respective investment concentration account into a redemption bank account. The redemption bank account is held at Deutsche Bank, and is registered to Fidelity Operations for the benefit of the investment options.  2) Later that same day, the IRS is paid.  3) Also, later that day, remaining funds are transferred to the REPO Account.  4) Once funds are transferred to the REPO Account, they are transferred to FICASH.  5) The following day, after remaining with FICASH overnight, the principal of those funds initially transferred to the FICASH are transferred back to the redemption bank account.  6) Depending on state tax remittance schedules, state taxes are then paid.  7) Either on or after the same day that the redemption account receives funds back from the FICASH program, participants may receive electronic disbursements from the redemption bank account.  8) If participants do not receive an electronic disbursement, the redemption bank account transfers funds to a disbursement bank account. The disbursement bank account is held at Deutsche Bank. The disbursement bank account then issues a check to participants. Participants receive funds after they deposit their checks.  Id.

[14] 29 U.S.C. § 1001(b) (2012).

[15] Waldbeser, supra note 12; see also United States Dep’t of Labor, Field Assistance Bulletin 2002–3 (2002), available at [hereinafter DOL Bulletin].

[16] Waldbeser, supra note 12.

[17] DOL Bulletin, supra note 15.

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