Delta Air Lines Charged for Excessive 401(k) Fees

Participants in Delta Air Line’s Delta Family Care Savings Plan have filed a proposed class action lawsuit against the company, the plan’s administrative committee and other fiduciaries alleging violations of the Employee Retirement Income Security Act (ERISA) regarding excessive fees.

The complaint says given its size and prominent place in the marketplace, the plan had and has the ability to demand and obtain lower cost investment options from providers. “The Defendants, however, did not provide the participants in the Plan with the lowest cost investment options that easily were available to them. This resulted in a failure of the most fundamental of the Defendants’ fiduciary duties to the Plan participants,” the lawsuit says.

Examples given in the complaint include: Defendants selected the fund Janus Forty S, with an expense ratio of 1.00, as an investment option, when the equivalent fund Janus Forty I, with an expense ratio of .60, was available; Janus Research T, with an expense ratio of .95, when Janus Research I, with an expense ratio of .78 was available; and PIMCO Low Duration ADM, with an expense ratio of .71, when PIMCO Low Duration D, with an expense ratio of .56 was available.

The plaintiffs cited research studies to argue that funds with higher fees are all but indefensible: they not only empirically fail to beat the market on a consistent basis, they are in fact mathematically unable to do so because the high fees cut into returns significantly, especially over time. “Essentially, high fees are apparently more likely to indicate bad funds than good ones,” the lawsuit says.

In addition, plaintiffs’ contend that a typical 401(k) plan offers roughly fourteen investment options, and note that defendants offered at least 200 investment options in the plan prior to 2011. The plaintiffs allege that many of these were functionally equivalent or otherwise duplicative and added nothing but confusion to the set of options available to participants. Even within each class of investments, defendants offered far more investment options than was reasonable. In addition, the plaintiffs say the defendants failed to monitor the investment options they offered, and instead allowed numerous poorly performing investment options to remain in the pool of available options year after year.

The lawsuit alleges that defendants’ conduct cost plaintiffs and the proposed class millions of dollars needlessly expended on excessive fees and costs.

In addition, the lawsuit claims that through their breach of their fiduciary duties the defendants allowed the plan to be charged costs and fees for administrative services like recordkeeping which were far in excess of what the plan should have paid. This, too, cost plaintiffs and the proposed class millions of dollars that could and should have been retained and invested in the participants’ retirement accounts, the lawsuit says.

The plaintiffs contend that revenue-sharing more often functions as sleight of hand to hide fees from plan participants, because it enables the mutual funds to present to participants investment options which appear to have especially low fees, even though those fees are generally included on the recordkeeping side instead. “Indeed, because the increased recordkeeping fees are generally not the focus of scrutiny, and because they generally provide for compensation based on the total size of the assets rather than a flat fee, … it is likely that revenue sharing actually results in higher total fees charged to the Plan, even while the participants believe that their fees have been lowered,” the lawsuit says.

In addition, the complaint notes if revenue-sharing is allocated based on the expense ratios of the underlying investments, then participants who choose investment options with higher expense ratios (e.g., 40 basis points) end up paying more for recordkeeping than participants who choose the equivalent investment options which have lower expense ratios (e.g., 10 basis points). Thus revenue sharing exacerbates the harm to plan participants that is already caused by inclusion of higher-cost investment options.

The lawsuit alleges that defendants failed to undertake a competitive bidding process for recordkeeping services, and while the defendants paid flat, per participant fees as direct compensation to Fidelity Investments for recordkeeping services, they also paid indirect compensation based on the amount of invested assets from 2010 through 2012. This indirect compensation ranged from 5 basis points to 55 basis points, depending on the mutual fund, with the most common fee being 35 basis points. “This decision resulted in excess and unnecessary fees charged to participants,” the complaint says.

“Fidelity had already been more than fairly compensated through direct payments, and thus indirect compensation through revenue sharing merely piled excess upon excess, with participants in the Plan bearing the cost,” the lawsuit continued.

Finally, the plaintiffs allege that the defendants agreed to revenue-sharing with Fidelity, but failed to limit and monitor the recordkeeper’s compensation. “Defendants thus allowed the recordkeeper to earn—and the Plan participants to pay—unreasonable and excessive compensation for recordkeeping services,” the complaint says.